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Kindly assist with question 191 in Kaplan F5 (PM) exam kit 2018 on division performance evaluation using ROI where operating profit is $1,370m and net value of all assets & liabilities at the start of the year was $4,500m and $4,890m at the end of the year and the ROI is required for year end performance.
The division called Pro is an investment center and carries no debt.I do not understand why the average of the net asset value was not used. Kindly explain the logic behind Kaplan’s answer.
I do not have the Kaplan exam kit (only the current edition of the BPP Revision Kit). However if it is marked in the kit as being a past exam question then I do have all past exam questions.
There is no rule as to whether to use the opening net assets, the average net assets, or the closing net assets – in practice it is up to the company to decide what they want to do.
In the exam, unless the question specifically says differently then the examiner uses the opening net assets on the basis that it is more likely that it was the assets at the start of the year that generated the profit for the year.
Thank you Mr. Moffat.
The question does not specify any rule for the company so I guess that is why the opening net asset figure was used.
This makes a lot of sense.Thank you for your wonderful lectures and also taking out time to answer questions. I am actually looking forward to my exams next month ie December!
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