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Depreciation in ROI and RI

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Depreciation in ROI and RI

  • This topic has 3 replies, 2 voices, and was last updated 3 weeks ago by LMR1006.
Viewing 4 posts - 1 through 4 (of 4 total)
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    Posts
  • September 3, 2023 at 7:00 pm #691257
    shopnipung@gmail.com
    Participant
    • Topics: 5
    • Replies: 4
    • ☆

    Sorry for such a silly question at the very last minute – to calculate ROI or RI do we deduct depreciation from earnings? My understanding is we do, but answers to a couple of questions on the ACCA study hub are massively confusing, so wanted to confirm, please. Many thanks

    September 3, 2023 at 10:07 pm #691262
    LMR1006
    Keymaster
    • Topics: 0
    • Replies: 292
    • ☆☆☆

    When calculating ROI (Return on Investment) or RI (Residual Income), the treatment of depreciation depends on the specific context and instructions given in the question.

    In some cases, depreciation may be deducted from earnings, while in other cases it may not be deducted.

    For ROI calculations, if the question specifies that the profit figure provided is already after charging depreciation, then depreciation does not need to be deducted again.

    However, if the profit figure is given before depreciation, then depreciation should be deducted from earnings before calculating ROI.

    For RI calculations, depreciation is generally not deducted from capital employed. Instead, the focus is on the profit figure before depreciation.

    The RI is calculated by subtracting a required rate of return (usually based on the cost of capital) from the profit before depreciation.

    It is important to carefully read and understand the specific instructions and context of the question to determine whether depreciation should be deducted from earnings when calculating ROI or RI.

    September 3, 2023 at 11:21 pm #691266
    shopnipung@gmail.com
    Participant
    • Topics: 5
    • Replies: 4
    • ☆

    thank you for your quick response and the clarification, much appreciated. Regards

    September 4, 2023 at 7:47 am #691275
    LMR1006
    Keymaster
    • Topics: 0
    • Replies: 292
    • ☆☆☆

    You are most welcome. :0-)

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