The asset turnover ratio is typically calculated by dividing net sales by which of the following?

• A. Net sales divided by total assets
• B. Net sales or revenue divided by the average total assets
• C. Net income divided by total assets
• D. Gross profit divided by assets

Answer: (B)

Asset turnover measures how efficiently a company uses its assets to generate sales. To reflect the asset base available over the entire period, the ratio uses net sales (or revenue) divided by the average total assets. The average is typically calculated as (beginning total assets plus ending total assets) divided by two, which smooths changes from purchases or disposals during the period. Using ending total assets alone can misstate the efficiency if large asset purchases occur late in the period, and net income or gross profit do not measure how effectively assets are turned into sales. So the standard form is net sales (or revenue) divided by average total assets.