The following information is extracted from Automotive Division for the year ended 31stDecember 2021:Statement of Financial Position USDNon-current Assets120,000Current Assets67,000TOTAL ASSETS187,000 Divisional Equity93,700Long Term Liabilities75,000Current Liabilities18,300TOTAL EQUITY &LIABILITIES187,000 Income Statement USDRevenue115,000(-) Cost of Goods Sold (COGS)(48,000)(-) Other operating expense(10,000)Operating Profit57,000(-) Interest Paid(17,000)Profit Before Tax40,000 The cost of capital for the division is estimated at 8% each year.You are required to calculate:i) Calculate the divisional Return on Investment (ROI) for the year ended 31st December 2021 using net assets approach.ii) Calculate the Residual Income (RI) for the year ended 31 December 2021.

Return on investment is one of the profitability ratio which compares operating profit with net…

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FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The following information is extracted from Automotive Division for the year ended 31st
December 2021:

Statement of Financial Position

	USD
Non-current Assets	120,000
Current Assets	67,000
TOTAL ASSETS	187,000

Divisional Equity	93,700
Long Term Liabilities	75,000
Current Liabilities	18,300
TOTAL EQUITY & LIABILITIES	187,000

Income Statement

	USD
Revenue	115,000
(-) Cost of Goods Sold (COGS)	(48,000)
(-) Other operating expense	(10,000)
Operating Profit	57,000
(-) Interest Paid	(17,000)
Profit Before Tax	40,000

The cost of capital for the division is estimated at 8% each year.

You are required to calculate:
i) Calculate the divisional Return on Investment (ROI) for the year ended 31st December 2021 using net assets approach.

ii) Calculate the Residual Income (RI) for the year ended 31 December 2021.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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