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At the end of 20X1, an investment center has net assets of $1m and annual operating profits of $190,000.
However, the bookkeeper forgot to account for the following:
A machine with a net book value of $40,000 was sold at the start of the year for $50,000 and replaced with a
machine costing $250,000. Both the purchase and sale are cash transactions. No depreciation is charged in the
year of purchase or disposal. The investment centre 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?In this question, the net asset doesn’t increase with the investment made because of same outflow of cash. But in an another question i see that net asset increase with the investment. what is the real solution ?
It depends on the wording of the question.
Tell me which exam question is the other one that you refer to, and then I will be able to explain.
Biscuits and Cakes is a past exam question and the answer is correct (BPP just reprint the examiners own answer).
It assumes that the cash is being provided by the head office. However if you think about it, to measure the performance we have to include the extra assets otherwise it would automatically be worthwhile under both measures and would be a rather pointless exercise 🙂
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