Discuss AICPA CPA-Business Exam Topic 3 Question 55

Limitations of the information provided by total asset turnover include:

AA good measure for trend analysis of a particular company, but variable ways of calculating cost of goods sold limit its usefulness for comparative analysis.

BThe calculation can be affected by varying accounting assumptions, which affect the calculation of net income.

CBecause of differing costs of capital, the measure cannot be effectively used for comparative analysis.

DWhen making the calculation, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

Suggested Answer: D

Choice 'd' is correct. When calculating the turnover, total assets may need to be refined by the elimination of assets that do not relate to sales as the inclusion of these items could distort the measure.

Choice 'a' is incorrect. This option pertains to gross profit margin.

Choice 'b' is incorrect. This option pertains to return on the investment in assets.

Choice 'c' is incorrect. This option pertains to residual income.

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11 comments · newest first

Dion 11 months ago

Just a reminder that total asset turnover is all about efficiency in using assets!

Georgeanna 11 months ago

Wait, D says we need to refine total assets? That sounds complicated!

Antonette 12 months ago

C seems a bit off to me. Costs of capital shouldn't affect turnover directly.

Alba 12 months ago

Totally agree with B! Accounting assumptions really mess with net income.

Aileen 12 months ago

A is spot on! Trend analysis is useful, but those calculations can get tricky.

Portia 1 year ago

I'm not entirely sure, but I feel like option D makes sense since excluding unrelated assets could give a clearer picture of asset efficiency.

Ira 1 year ago

I think option B sounds right because accounting assumptions can really skew net income, which affects the turnover ratio.

Jamal 1 year ago

I remember discussing how total asset turnover can be misleading for comparative analysis due to different ways of calculating COGS.

Julio 1 year ago

I vaguely recall a practice question about how varying costs of capital impact financial ratios, but I’m not confident it applies here.

Arthur 1 year ago

Hmm, I'm a bit stumped on this one. All the options sound like they could be involved in cloud services in some way. I'll have to use the process of elimination to try to narrow it down.

Ernest 1 year ago

The key is recognizing that the question is asking about the risk or danger that still exists even when all safety measures are in place. "Residual risk" seems like the most appropriate phrase to fill in the blank.

AICPA CPA-Business Exam - Topic 3 Question 55 Discussion