Asked by Gustavo Perez-Ramirez on May 05, 2024
Verified
Which of the following statements provide(s) an argument in favor of including only a plant's net book value rather than gross book value as part of operating assets in the ROI computation?
I. Net book value is consistent with how plant and equipment items are reported on a balance sheet.
II. Net book value is consistent with the computation of net operating income, which includes depreciation as an operating expense.
III. Net book value allows ROI to decrease over time as assets get older.
A) Only I and III.
B) Only I and II.
C) Only I.
D) Only III.
ROI Computation
The calculation of Return on Investment, which measures the gain or loss generated on an investment relative to the amount of money invested.
Net Book Value
The value of an asset after accounting for depreciation or amortization found on a company's balance sheet.
Operating Expense
Expenses incurred from a company's operational activities, excluding cost of goods sold, such as selling, general, and administrative expenses.
- Comprehend the principle of return on investment (ROI) and the method for its computation.
- Scrutinize performance measurements, notably margin and turnover.
Verified Answer
TT
Thalia ThonyMay 09, 2024
Final Answer :
B
Explanation :
Statement I is correct because net book value is the value of an asset after depreciation, and is consistent with how plant and equipment items are reported on a balance sheet. Statement II is also correct because net operating income includes depreciation as an operating expense, which is consistent with using net book value for the ROI computation. However, statement III is incorrect because using net book value causes ROI to increase over time as assets get older due to decreased depreciation expense, not decrease as stated.
Learning Objectives
- Comprehend the principle of return on investment (ROI) and the method for its computation.
- Scrutinize performance measurements, notably margin and turnover.