Chartered Financial Analyst (CFA) Level 1 Practice Exam

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What is the formula used to calculate the cash return on assets?

CFO / average total assets
CFO / total equity
CFO / current liabilities
CFO / total assets

The correct answer is: CFO / average total assets

The formula for calculating cash return on assets is derived by taking the cash flow from operations (CFO) and dividing it by the average total assets. This ratio provides insight into how effectively a company is able to convert its investments in assets into actual cash flow from operations. A higher ratio indicates a more efficient use of assets in generating cash. Using average total assets in the denominator offers a balanced view by capturing the fluctuations in asset values over time, which can provide a more accurate picture of how productive the assets are in generating cash flow. In contrast, focusing on total equity, current liabilities, or just total assets would not appropriately reflect the efficiency of asset utilization for generating cash flow, making these options unsuitable for this specific calculation.