Equity Investments

Question:“In a Set of Financial Statements, What Information Is Conveyed about Equity

Investments?” completes coverage of the assets reported by a company on its balance sheet. In earlier chapters

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on receivables, inventory, and property and equipment, vital signs were computed and explained as figures and

ratios often used in evaluating a company—especially its financial health and future prospects. Do any similar

vital signs exist for assets as a whole that decision makers typically use as part of an overall evaluation?

Answer: A company controls a specific amount of assets. Most investors and other decision makers are interested

in how effectively management was able to use these resources. Individuals who study companies search for signs

that an appropriate level of income was generated from the assets on hand.

Total asset turnover. Total asset turnover is one such figure. It simply indicates management’s efficiency at

generating sales. Sales must occur before profits can be earned from normal operations. If assets are not well used

to create sales, profits will probably never arise.