Which of the following statements is true?
A) If the asset turnover ratio remains constant and the profit margin increases,return on assets must have increased.
B) If return on assets increases,return on equity must increase.
C) If the current ratio increases,the quick ratio will also increase.
D) If return on assets decrease return on equity will increase.

Question

Quizplus · Accepted Answer

Return on assets is calculated by multiplying the profit margin by the asset turnover ratio. Therefore, if the profit margin increases while holding the asset turnover ratio constant, return on assets will increase.

B) is False. It is possible for return on assets to increase while return on equity decreases if the company is taking on debt to finance its assets.

C) is False. The quick ratio only takes into account quick assets, which are a subset of current assets. Therefore, an increase in the current ratio does not necessarily indicate an increase in the quick ratio.

D) is False. Return on equity is calculated by dividing net income by shareholders' equity. Therefore, a decrease in return on assets would likely lead to a decrease in net income, which would decrease return on equity.

Which of the Following Statements Is True