CMA Study Group

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  • 1.  ROI Calculation

    Posted 11-22-2020 10:29 AM
    Hello,

    In this problem shown below why is net working capital used in the ROI calculation? Is this because it's considered a current asset?
    image.png
    A company has recently implemented responsibility accounting in all 7 segments of the company. The following information is available for Segment W for the last quarter.
    Net working capital
    $1,200,000
    Property, plant, and equipment, net
    3,175,000
    Revenues
    8,000,000
    Cost of sales
    6,350,000
    General and administrative expenses
    180,000
    Based on the information provided, if the company treats Segment W as an investment center, what is the return on investment for the last quarter?  


  • 2.  RE: ROI Calculation

    Posted 11-22-2020 12:47 PM
    This is tricky because the formula for ROI can have many variations.  However, according to my Wiley study package, the official formula for the CMA exam is "Income / Assets".  They must consider net working capital in this problem to be a current asset, but that's not technically true as NWC = current assets - current liabilities.

    I'm not sure what advice to offer if you come across a MCQ like this on the exam.  However, if it comes up on the essay component, be sure to show your work and explain your reasoning for including or excluding net working capital.  You clearly know the formula, so you'll get full or close to full credit if you detail out your calc.

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    Michael Ramsey
    Director/Manager
    Omaha NE
    United States
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  • 3.  RE: ROI Calculation

    Posted 11-23-2020 10:03 AM
    I agree.  I wonder if this is one if those questions were you have to work the problem backwards to find the answer that matches.  Was there an answer for just using PPE?

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    John Stuller
    Student
    Ojai CA
    United States
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  • 4.  RE: ROI Calculation

    Posted 11-23-2020 11:48 AM
    The explanation is not doing a complete job of explaining the answer since there are many variations of ROI, using assets, non current assets, and so forth. Since this is an investment center it is likely calculating the ability of the segment to generate a return on its assets, therefore I believe the ROI calculation equation would equal net profit / (fixed assets + net working capital)

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    Don Hadjian
    Accountant
    Downey CA
    United States
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  • 5.  RE: ROI Calculation

    Posted 11-24-2020 02:38 AM
    roi = net income/working capital 
    = 1470000/4375000 = .336

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    Altayeb Abdulqader
    Accountant
    JEDDAH
    Saudi Arabia
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  • 6.  RE: ROI Calculation

    Posted 11-24-2020 08:17 AM
    I don't know why the question didn't specify but as per my knowledge this should be Return On Invested Capital. 

    The mathematical formula for ROIC is more complex than ROE, ROI, or even ROA.  The equation for this measure is as follows:

    ROIC = Net Operating Profit after Taxes / Invested Capital

    Where:

    • Net Operating Profit after Taxes (NOPAT) = Operating Profit x (1 - Tax Rate)
    • Invested Capital (IC) = Fixed Assets + Non-Cash Working Capital
    • Non-Cash Working Capital = Current Assets - Current Liabilities - Cash

    This is my opinion. Please correct me if I am misunderstood.

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    Ashvin Kulkarni
    Accountant
    Pune
    India
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