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Dear John,
I’ve been going through the BPP practice questions and the following I don’t understand
Which of the following statements are valid criticisms of ROI as a performance measure
i It is misleading to compare departments with different levels of risk
ii It is misleading to compare assets of different ages
iii it’s use may discourage investment in new and replacement assets
iv The figures needed are not easily availableThe first three are correct. I can see why the 4th is not correct but I can’t see why the other three are correct. I haven’t done f3, so I can’t always see the relationship in the balance sheet.
Many thanks
Nadine Chapman
1. If something is more risky then we will want a higher return to compensate us for the extra risk.
2. If one division has a much older asset, then it will have depreciated more and therefore the value of the asset in the SOFP (balance sheet) will be a lot older. So if assets are lower then ROI will be higher.
3. If they replace old assets then the value of assets in the SOFP will be higher which will mean a lower ROI.
That makes sense and is easy to understand. Thanks, as always, for your clear lectures and responses.
Nadine
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