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Bollon uses residual Income to appraise its divisions using the cost of capital d 10%. It gives the managers or these divisions considerable autonomy although it retains the cash control function at head office.
The following information was available for one or the divisions:
net profit PBIT Division net Cash(overdraft)
after tax. asset.
$000 $000 $000 $000
47 69 104 (21)What is the residual income for this division based on controllable profit and controllable net assets?
(a) $36,600 (b) $56,500 (c) $58,600 (d) $60,700Dear sir,
Cash (overdraft)
Is a current liability
So why do we add it when we calculate the capital employedCash is controlled by head office and so in arriving at the controllable net assets we need to remove the overdraft.
Net assets are arrived at after subtracting the overdraft and so to find out what the net assets are without the overdraft we need to add it.
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