Skip to content
Sign inRegister

FM

Accounting Rate of Return - ACCA Financial Management (FM)

VIVA Subject Guide
YouTube video

30 Comments

  1. Mulumbe
    You are the best John.
  2. John MoffatTutor
    Thank you :-)
  3. Storm
    Thank you very much sir.
    I am also inquiring, when do we discount the cashflows to present values when calculating for the payback period. Because in the example it seems we aren't putting the value of money into consideration?
  4. John MoffatTutor
    If a question simply asks for the payback period then we do not discount the flows.

    If it asks for the discounted payback period then we discount the flows first (as stated in our lectures notes, and as we did for Paper MA).
  5. Kinga
    Hi Sir,
    thanks for lectures , quick question for ARR and payback method do we need to use discount factor ?.

    Thanks in advance
  6. John MoffatTutor
    Not for ARR. We need to discount if we are calculating the discounted payback period.
  7. RubySupporter
    Dear sir. If we have working capital in ARR question, how are we going to compute the average book value? Say we have 10,000 at the start of the project and release it at the end of the project. Thank you so much.
  8. John MoffatTutor
    It will be ignored because it will effectively have been turned back into cash as opposed to being tied up in inventory etc..
  9. Asher
    Thank you for this lecture. If I may ask, why is the scrap vale of $10,000 not included as part of the total cash flow of $100,000 in calculating the total profit p.a.?
  10. John MoffatTutor
    The scrap value is never a profit in financial accounting, and this is an accounting measure.
  11. Asher
    Thanks for the clarification
  12. John MoffatTutor
    You are welcome :-)
  13. rafa
    ARR and Average Investment Method Same Thing? If not Please tell Me What is difference between Them?
  14. John MoffatTutor
    They are the same thing.
  15. Ram
    For ARR and payback period,
    Could we use the formula like

    Cash inflow= profit + depreciation


    By the way , I thought to ask this question in Ask to Tutor, but I couldn't find it for FM.
  16. John MoffatTutor
    ARR is calculated using the average profit, payback period is calculated using cash flows (which are the profits before depreciation).

    There is an Ask the Tutor Forum for Paper FM. Click on the 'forums' tab and you will see it on the list!
  17. Ram
    In example 8, the net operating cash inflow is just a simple cash flow or it is net operating profit ?

    Because for operating profit, we should not do depreciation.
  18. John MoffatTutor
    Cash flow means what it says - cash! That is not the same as the profit.
  19. Ram
    Is ARR and ROCE is same?
  20. John MoffatTutor
    ARR is calculated as a way of appraising an investment, and use the average expected profit.

    ROCE is calculated for a company as a whole and is calculated at the end of each year (think back to Paper FA (was F3) or whatever exempted you from it).
  21. Ismail
    Hi John,

    I didn't get the point of average book value.

    Book value formula = cost - depreciation

    =80,000-17,500

    =62,500 p.a

    If I divide 62,500 by 2 in order to compute average of book value so the answer will be 31,250.

    Just clear my concept through this process of average book value.

    Thanks.
  22. John MoffatTutor
    To get the average during the year you add together the values at the start and end of the year, and then divide by 2.
  23. Ismail
    got the point.

    Thanks John.
  24. John MoffatTutor
    You are welcome :-)
  25. Yanru
    10000+(80000-10000)/2=45000
  26. faith20ul19
    Am cool with these approaches. Thank you sir
  27. John MoffatTutor
    Thank you for your comment :-)
  28. a7mdsuliman
    Hi John, the average profit divided over 4 while average book value divided only over 2.
    shouldn't be also over the useful life of the asset ?

    Thanks
  29. John MoffatTutor
    No. The average book value of the asset is the average of the value at the start and the value at the end - we add them together and divide by 2.

    Do watch the lecture again, because I do explain the reasoning.
  30. John MoffatTutor
    To calculate an average of two numbers, you add them together and divide by 2.

    If the scrap value had been zero, then the average value would have been 80,000/2 = 40,000.


    The value at the end is more than zero, and so the average value is higher than 40,000.

Leave a comment