Martha's Sweet Shop reduced its fixed assets this year without affecting the shop's operations,sales,or equity.This reduction will increase which of the following ratios?
I.Capital intensity ratio
II.Return on assets
III.Total asset turnover
IV.Return on equity
A)I and II only
B)II and III only
C)II, III, and IV only
D)I, II, and IV only
E)I, II, III, and IV

Question

Quizplus · Accepted Answer

Reducing fixed assets without affecting sales or equity would result in the company having fewer total assets, but the same level of sales and equity. Therefore, the ratios that would be affected are those that use total assets as the denominator. The capital intensity ratio, which measures the amount of fixed assets needed to generate sales, would not change because it is not affected by changes in total assets. However, return on assets (ROA) and total asset turnover (TAT) would both increase because the same level of sales are being generated with a smaller investment in assets. Return on equity (ROE) would not be affected because it is not based on total assets. Therefore, the correct answer is B (II and III only).

Martha's Sweet Shop Reduced Its Fixed Assets This Year Without