ACCA Performance Management (F5) Certification Practice Exam

What formula is used to calculate asset turnover?

1. Turnover / Assets

2. Turnover / Capital employed

3. Assets / Capital employed

4. Assets / Turnover

The correct answer is: Turnover / Capital employed

The correct formula for calculating asset turnover is derived from the relationship between a company's revenue (turnover) and its total assets. Asset turnover measures how efficiently a firm uses its assets to generate sales. The appropriate formula is turnover divided by total assets. This indicates how many dollars of sales are generated per dollar of assets, helping assess the efficiency of asset utilization. A higher asset turnover ratio suggests better performance, as it means the company is able to generate more revenue from its assets. In contrast, using options that refer to capital employed does not provide a direct assessment of asset utilization in relation to overall sales. Capital employed typically pertains to the funds used for business operations, which does not directly relate to how efficiently assets are being turned into revenue. Therefore, choosing turnover divided by capital employed does not accurately reflect the asset turnover ratio.