Q18RQ - Horngren'S Financial And Managerial Accounting

Question

Describe the two ways ROI can be calculated.

Step-by-Step Solution

Answer

Two ways to calculate ROI are as follows:

$$\begin{gathered} ROI=\frac{Net Income}{Cost of investmennt} \\ ROI=\frac{Investment gain}{Investment base} \end{gathered}$$

Step 1: Meaning of ROI

ROI can be a metric used to evaluate the effectiveness or productivity of investment. When deciding the return on investment (ROI) for a particular investment or speculative, divide by the value of the return or return from the initial investment.

Step 2: The two ways to calculate ROI

Operating income divided by average total assets is the return on investment. The calculation components are more clearly displayed in the ROI equation's extended version. The formula is as follows:

$$\begin{gathered} 1. ROI=\frac{Net Income}{Cost of investment} \\ 2. ROI=\frac{Investment gain}{Investment base} \end{gathered}$$

The most widely used ratio is the first iteration of the ROI formula, which is net income divided by the cost of an investment.

The simplest method to understand the ROI formula is to divide some "benefit" by the "expense." Asking someone to specify precisely how they measure something's ROI is vital when they claim it is good or terrible.