Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA PM Exams › Financial performance Measurement.
- This topic has 7 replies, 2 voices, and was last updated 3 years ago by John Moffat.
- AuthorPosts
- January 25, 2021 at 3:42 am #607831
Dear John,
How are you?
I hope you are doing well,
The following question is mentioned in Kaplan Kit Exam and it says,
At the end of 20X1, an investment center has net assets of $1 m and annual operating profits of $190000 . However, the bookkeeper forgot to account for the following .
A Machine with a net book value of $40000 was sold at the start of the year for $50000 , and replaced with a machine costing $250000 . Both the purchase and sale are cash transaction .No depreciation is charged in the year of purchase or disposal. The investment center calculates return on investment (ROI) based on closing net assets.
Assuming no other changes to profit or net assets , what is the return on investment (ROI) for the year .
This was the question and the answer according to kaplan kit it is 19.8%
Ok Sir, my question is i had calculated the net effect on the Net assets and the income statement and i found out that the net effect on the income statement is $10000 as increase in capital gain and the net effect on the net assets is increase in $10000 as a cash .
My question is according to kaplan kit solution it takes into consideration the increase in the total profit of the capital gain but iam asking you why? if we use operating profit before interest ans tax it shouldn’t include any capital gains or loss.
As per my understanding Operating income is the amount of income a compan generates from its core operations, meaning it excludes and income and expenses not directly tied to the core business.Thank you in Advance,
January 25, 2021 at 9:27 am #607883The profit on the sale of a non-current asset is not a capital gain, it is simply correcting for the fact that too little depreciation had been charged.
This is knowledge from Paper FA (was F3) in that any profit or loss on the sale of an asset appears in the SOPL and does affect the operating profit. The profit or loss is the difference between the sale proceeds and the net book value of the asset sold.(A capital gain is the excess of the sale proceeds over the original cost and is of no relevance whatsoever apart from possible tax implications, but that is only examined in Paper TX and is irrelevant for all other exams.)
January 25, 2021 at 1:04 pm #607962Dear John
According to your nice and informative answer does this amount ($10000) should be included in operating profit? and does it classified as Cash flow from operating activities in cash flow statement?
January 25, 2021 at 2:16 pm #607974The $10,000 is certainly included in the operating profit is the SOPL.
In the Statement of Cash Flows it is removed from the operating profit because it is not a cash flow. The cash flow is the receipt of $50,000 and is shown under the heading of ‘cash flows from investing activities’. However you are not asked to produce Statements of Cash Flows in Paper PM.
January 25, 2021 at 4:53 pm #607987Finally sir, I had been doing the following J.V before
Dr: Cash. $ 50000
Cr: Machine $40000
Cr: Capital gain. $10000.
I got your pint and actually iam thankful what is the account which we can use rather than capital gain? as you explained its not capital gain.January 26, 2021 at 9:10 am #608052The credit is to a disposal account, which then appears in the SOPL.
This is Paper FA (was Paper F3) knowledge, and the double entry is not relevant for Paper PM.
January 26, 2021 at 6:25 pm #608147Thank you so much sir.
January 27, 2021 at 9:16 am #608201You are welcome 🙂
- AuthorPosts
- The topic ‘Financial performance Measurement.’ is closed to new replies.