Whencalculating return on net operating assets, analysts sometimes makeadjustments to the net operating asset base used in the denominator ofthe ratio. Three possible adjustments are listed below. Explain whatthese adjustments are, and discuss the merits of these adjustments.

1. Non-operating asset adjustment
2. Intangible asset adjustment
3. Accumulated depreciation adjustment

Just do response each posted # 1 to 3 down below only.

Posted 1

Non operating assets like investment in marketable securities andexcess cash are deducted from capital. They are not considered to be apart of company’s core operations. The non operating assets could beunused land, spare equipment, and investment securities. The income acompany earns from non-operating assets will be calculated under the nonoperating income for a company.

Intangible asset adjustments deducts intangible assets fromInvestment capital. The examples of intangible asset are trade marks,customer lists, motion pictures and franchise agreements. Under the GAAPguidelines, intangible assets are periodically reviewed for impairmentand written down if necessary. The intangible assets also representsvalid investments by the company. The management team is responsible formaking they there is return on all investments.

The accumulated depreciation adjustments adds the depreciable assetsto the balance sheet. There are no adjustments to the net income fordepreciation expense. Even there are no adjustments, the return oninvestment (ROI) will still go up as the assets get older. The mainreason for that is the assets are in good working conditions. However,the aging equipment may require to add additional cost which will impactthe total earnings.

Posted 2

When calculating RNOA (return on net operating assets), the denominator of the formula is average NOA (net operating assets). Non-operating assets are assets that are not considered necessary to conduct the company’s business or daily operations. Determining which assets are non-operating assets can sometimes be left up to interpretation by analysts and investors. For example, equity investments may be left out of NOA because they are considered nonstrategic. Other investments considered to be strategic are included in NOA. Intangible assets such as goodwill are sometimes removed from NOA. As Kenton (2019) notes, goodwill “is often simply derived from an acquisition, rather than being an asset purchased for use in producing goods.” Other times, goodwill is considered an operating asset when the investment is presumed to be strategic in nature. Accumulated depreciation is typically removed from NOA, as fixed assets are calculated as net fixed assets. Adjustments will sometimes be made to normalize NOA, such as when accelerated depreciation is utilized. Overall, it is important for investors to fully analyze a company’s assets in order to correctly calculate, analyze, and compare RNOA.

Posted 3

Good morning class,

When an analyst calculates the return on net operating assets, he mayadjust the denominator (net operating assets) in various ways. Each ofthese adjustments will change the amount of the return. Therefore, it’simportant to consider which adjustments to make and why. The followingare three possible adjustments and their effect on the return.

1. Non-operating asset adjustment: Removing non-operating assets fromthe ratio will have the effect of increasing the return. One reason tomake this adjustment is to exclude assets that aren’t used in the normalcourse of business.
2. Intangible asset adjustment: This adjustment subtracts a company’sintangible assets from operating assets, which will have the effect ofincreasing the return.
3. Accumulated depreciation adjustment: One thing to consider with thisadjustment is that it’s technically a noncash expense, meaning thatthere is no cash outflow associated with the expense.