Answer:
b. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to increase.
Explanation:
The options are as follows
a. Asset turnover decreased, therefore, total assets had to decrease. If total assets decreased, yet the return on assets also increased, then net income also had to increase.
b. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to increase.
c. Asset turnover decreased, therefore, total assets had to decrease. If total assets decreased, yet the return on assets also increased, then net income also had to decrease.
d. Asset turnover decreased, therefore, total assets had to increase. If total assets increased, yet the return on assets also increased, then net income also had to decrease.
Let us assume the sales is $100,000
So, the asset turnover equal to
Asset turnover = Sales ÷ Total Assets
1.6 = $100,000 ÷ Total assets
Total assets = $62,500
Now the return on assets equal to
Return on assets = Profit ÷ Total Assets
15% = Profit ÷ $62,500
So, the profit is $9,375
Now in the current year
The asset turnover equal to
Asset turnover = Sales ÷ Total Assets
1.2 = $100,000 ÷ Total assets
Total assets = $83,333.33
Now the return on assets equal to
Return on assets = Profit ÷ Total Assets
19% = Profit ÷ $83,333.33
So, the profit is $15,833.33
Now the increase in asset and profit is
Increase in asset = ($83,333.33 - $62,500) ÷ (62500)
= 33.33%
And, the increase in profit is
= ($15,833.33,- $9,375) ÷ ($9,375)
= 68.89%
As we can see that the increase in asset decreased but at the same time the increase in profit increases that results in increases in total assets and the increment in return on assets.
