The above expanded version will produce the same ROI because divisional sales cancels out both the denominator in the first factor and the numerator in the second factor. However, the expanded version of ROI formula is very useful for analysis and decision purposes.
What are the different heads of income?
A merchandising firm sells its goods through department stores and discount houses which it has setup for operating the sales. It can be observed that the Department Stores earns higher profit per Rupee of sales but only turns over capital assets employed only twice. However, profit earned per rupee of sales harvard admissions supplemental essay lower which is only measuring of national income.
For example, the fact that division A has net income of Rs 50, does not necessarily mean that it was more successful than Division B which has profit of Rs 40, The difference between these profit levels could be attributable entirely to a difference in the investment size of divisions. In such a situation, ROI proves to be a good measure of performance of a division. This gives the total cost of goods available for sale. Any item deducted from the debit side of an account is, in effect, credited to the account.
Deducting closing stock from the debit side of the trading account is therefore crediting it to that account. We have now arrived at the cost of sales. Point to Note: The debit to stock account for closing stock is the value of the current asset of closing stock which will be included in the balance sheet, as we shall see later. When the opening stock is credited to the stock account in the next period, it will balance off the stock account. Net sales turnover and net purchases: Goods which have been returned by customers are represented by a debit balance on the sales return account.
This must be transferred to the trading account, otherwise the sales and gross profit in that account will both be overstated. Following the same reasoning that allows us to deduct closing stock on the debit side of the trading account, we may deduct the debit balance on the sales returns account from the sales credited in the trading account.
In this way, we show the net sales for the year. Net sales are known as turnover. Similarly, we show the credit balance on the purchases returns account as a deduction from purchases in the trading account to show the net cost of purchases. Goods which have been returned to suppliers must not be included in the cost of sales.
Divisional income from operations should be compared
Point to Note: The order of items is most important. Sales returns must be deducted from sales; purchases returns must be deducted from purchases; carriage inwards, if any, must be debited in the account before closing stock is deducted.
A trading account is prepared very much like a manufacturing account but substituting the production cost of completed goods for the usual purchasing figure see exercise 2. Now attempt exercise 2. Smith at 31 December 19X8. Debit balances represent expenses and losses of the business and are known as overheads, e. These must now be transferred to the profit and loss account so that we can calculate the net profit of the business from all its activities.
The profit and loss income statement presents a summary of the revenues and costs for an organisation over a specific period of time. Such a statement is generally developed on a monthly, quarterly and yearly basis. The profit and loss statement enables a marketer to examine overall and specific revenues and costs over similar time periods and analyses the organisation's profitability. Monthly and quarterly statements enable the firm to monitor progress towards goals and revise performance standards if necessary.
When examining a profit and loss statement, it is important to recognise one difference between manufacturers and retailers. For manufacturers the cost of goods sold involves the cost of manufacturing products raw materials, labour and overheads.
What is Income from Other Sources?
For retailers, the cost of goods sold involves the cost of merchandise purchased for resale purchase price plus freight charges. The balance sheet shows that the profit for an accounting period increases proprietor's funds. The trading and profit and loss account shows, in detail, how that profit or loss has arisen. The following provides an explanation. This is done by comparing sales to the costs which generated those sales. A retailer, for example, will purchase various items from various suppliers, and add a profit margin.
Njaala [CPA T ] dissertation assistance writing have been delegated profit responsibility. It measures the return on the investment in assets for a business or division. If an investment center maintains the same annual profit, and keeps the same assets without a policy of regular replacement of non- current assets, its ROI will increase year by year as the assets get older.
The operating income line of this income statement provides information needed for the numerator of the ROI calculation. Assume all assets at Game Products, Inc. We use the information in Figure Since all assets at Game Products, Inc. For Sporting Goods division, The ROI measures presented in Figure Since managers of each division are responsible for maximizing profit based on investments they make in assets, ROI is a reasonable approach to evaluating each manager.
The Sporting Goods division manager appears to be outperforming the other two managers based on this measure. Like most financial measures of performance, ROI can be calculated in several different ways.
The components of this calculation often vary from one organization to the next. These variations are discussed next. Question: For the purposes of the Game Products, Inc. However, organizations often create their own unique calculation of operating income for internal evaluation purposes.
How might the internal calculation of operating income vary from U. Answer: There are several variations that organizations use when calculating operating income.
Two of the more common variations are discussed next. The segmented income statements for Game Products, Inc. Notice the expense line item labeled allocated overhead from corporate.
Although we include this expense in calculating operating income, many organizations do not, particularly if division managers have no control over allocated overhead. Excluding allocated overhead has the effect of increasing ROI for each division manager and holds each division manager responsible only for expense amounts that are controllable.
Review Figure Although we do not include income tax expense in the operating income calculation, some organizations prefer to include this item. Including after-tax expense reduces ROI for each division manager assuming each division is profitable. The point here is that the needs of management determine how to define operating income. We will use the U.
GAAP definition, presented as operating income in Figure Question: For Game Products, Inc. That is, all assets are used in the daily operations of the business. As discussed earlier, assets that are not used in the daily operations of the business, such as land held for investment or buildings sublet to other companies, are not included in this calculation. The average is found by taking the beginning balance plus ending balance and dividing by two.
The issue in this calculation focuses on long-term assets that are depreciated over time. What options exist in valuing long-term assets for the purpose of calculating ROI? Answer: There are two common approaches to valuing long-term assets when calculating ROI.
Each approach is discussed next. In the Game Products, Inc. That is, accumulated depreciation is subtracted from the original cost on the segmented balance sheet in accordance with U. The balance sheet presented in Figure The advantage of using net book value is that the information is easily obtained from the financial records.
The problem with this approach is division managers with older assets that have been substantially depreciated have an advantage over division managers with newer assets that have not been significantly depreciated. Older assets have a lower net book value cost - accumulated depreciation than newer assets, which reduces average operating assets in the denominator and increases ROI.
For example, assume two divisions have identical operating income for the year and identical assets. However, Division 1 has been in operation for many more years than Division 2 and thus has far more accumulated depreciation on long-term assets.
This results in a lower net book value on long-term assets for Division 1 as shown in the following:. Assuming all other assets are identical, and both divisions have identical operating income, Division 1 will have a higher ROI simply because long-term assets are older and have more accumulated depreciation, thereby reducing average operating assets in the denominator.
Reducing the denominator increases the ratio. An divisional income from operations should be compared weakness in using net book value to calculate average operating assets is the disincentive it creates for division managers to replace old and inefficient long-term assets, such as equipment and machinery. Although new equipment purchases may be needed to improve efficiency and to remain competitive, the short-term impact is to reduce Income from other sources.
Older equipment will have a lower net book value than identical newer equipment. Thus replacing old equipment will decrease ROI. An alternative approach in calculating ROI is to use gross book value in the average operating assets calculation. Gross book value simply refers to the original cost of long-term assets and ignores accumulated depreciation. In our example of two divisions with identical assets and identical operating income, the same original cost amount is used in calculating average operating assets.
Division 2 is not penalized in the denominator for having newer assets and less accumulated depreciation. Although both net book value and gross book value are used in practice, we will use net book value throughout this chapter unless indicated otherwise.
GAAP definition of operating income is used for the numerator. However, organizations often calculate operating income differently. Some exclude allocated overhead while others may include income tax expense to get after-tax operating income. Long-term assets are valued at net book value. However, valuation of long-term assets varies from one organization to the next. Some use gross book value rather than net book value. Internal Performance Measures at General Electric. General Electric Company provides financial information for six segments in its annual report.
This statement reaffirms the point that companies tailor performance measures to meet the needs of each individual segment. For example, General Electric excludes interest and other financial charges in measuring segment net income for some segments, such as Healthcare, NBC Universal, and Industrial, while including interest and financial charges for other segments, such as Commercial Finance and GE Money.
This is a continuation of Note Recall that Kitchen Appliances has two divisions broken out by region-a Southern division and a Northern division.
The following segmented income statement is for the most recent fiscal custom dissertation writing service kong ended December 31 you were asked to prepare this income statement in Note Segmented balance sheets for Kitchen Appliances appear as follows.
Average operating assets are calculated in the following. Note that land held for sale is not an operating asset and thus must be deducted from total assets to find operating assets. For Southern division, Answer: Many companies break ROI down into two ratios; operating profit margin and asset turnover. Each of these measures can be used to evaluate strengths and weaknesses of ROI within each division.
Operating profit margin The ratio of operating income to sales. It provides information about how much operating profit is being produced for each dollar of sales. Asset turnover The ratio of sales to average operating assets. It provides information about how much revenue each dollar invested in average operating assets produces.
These two ratios can be multiplied by each other to find the ROI as follows:. Breaking out ROI into these two ratios provides information that divisional income from operations should be compared division managers identify areas for improvement. ROI can be improved by increasing the operating profit margin, which focuses solely on income statement information.
Question: How are these ratios used to evaluate the three divisions at Game Products, Inc.? However, Computer Games has the highest asset turnover at 0. This information helps each division manager identify strengths and weaknesses. For example, the Computer Games division has excellent asset turnover relative to other divisions, but has a very low profit margin.
The manager of this division must look for ways to improve the profit margin for its products e. Another example is the Sporting Goods division, which has an excellent profit margin, but relatively low asset turnover. The manager of this division must look best dissertation writing quotes ways to improve the utilization of assets to increase turnover. ROI is defined as operating income divided by average operating assets as shown in the following equation:.
This measure provides an assessment of how effectively each division is using operating assets to produce operating income. ROI can also be broken into two separate ratios, operating profit margin and asset turnover, which are multiplied together to get ROI as follows:. Many variations of the ROI calculation are used in practice depending on the nature of the organization. Use the information in Note Question: Although ROI is commonly used as a divisional performance measure, some division managers dislike this measure.
Why do some division managers income from other sources not to use ROI as a performance measure? Answer: Some managers dislike ROI because it can lead to decisions that benefit the division but hurt the organization as a whole. For example, assume the manager of a division is evaluated based on ROI, and the division currently has an ROI of 20 percent:. The calculation is as follows:.
Rather than using a ratio to evaluate performance, RI uses a dollar amount. Notice that operating income and average operating assets used here to calculate RI are the same measures used in the ROI calculation presented earlier. For example, a company that raises funds by issuing bonds would use the interest rate associated with the bonds in establishing its percent cost of capital.
We will always provide the percent cost of capital in this chapter, leaving detailed discussions of its calculation to more advanced courses.
Measuring of national income
Note that several sources provide cost of capital information by industry. One source is the Leonard N. Note that some organizations make adjustments to the cost of capital to determine the minimum required rate of return.
Throughout this chapter, assume percent cost of capital is the same as minimum required rate of return unless stated otherwise.
As shown in this example, using RI as a performance measure is an effective way to minimize the conflict between company goals and division goals that arise using ROI. Question: Although RI resolves some of the problems of using ROI as a performance measure, it does not provide an efficient means for comparing divisions. What is the problem with using RI to compare divisions? Answer: Similar to the problem encountered with using segmented net income to compare divisions, RI is stated in dollars or some other currency rather than as a ratio.
One division may have high RI simply because it has a larger asset base, which produces higher revenues. Thus division managers should be evaluated based on how effectively they increase RI from one period to the next, perhaps in percentage growth, and not on how their RI compares to other divisions. Using both measures has the benefit of comparing one division to another by using ROI and minimizes the conflict between company goals and division goals by using RI.
How did the three divisions perform using RI as the measure? Notice that Sporting Goods and Board Games have positive RI, which indicates both divisions are producing operating income above and beyond the minimum required rate of return. Since the Computer Games division has negative RI, this division is not producing enough operating income to achieve the minimum required rate of return. Operating income and average operating assets used to calculate ROI are also used here to calculate RI.
The goal divisional income from operations should be compared for each division manager to increase RI over time. This is a continuation of the Kitchen Appliances example presented in Note Financial information for Kitchen Appliances is provided again as follows. Assume the cost of capital rate is 6 percent.
Question: Another measure of performance similar to residual income RI is called economic value added. What is economic value added, and how is it used to evaluate divisions? Some forms of income, such as the sale of a building you are no longer going to be using, are included "below-the-line" i. These include the effect of accounting changes, income from discontinued operations, and extraordinary items gaines or losses that are unusual or highly abnormal.
Multi-Step Screenshot. Disclaimer : This spreadsheet and the information on this page is for illustrative and educational purposes only.
We do not guarantee the results or the applicability to your financial situation.Pinterest Reddit. By Preeti Motiani. The income tax department has made a few changes to the income tax return ITR forms for this year. This means that there will be changes in the information you will have to key in. For instance, this year filling details under the head 'Income from other sources' in ITR-1 form will be different from last year.
Last year's ITR-1 had asked for only the aggregate amount of 'Income from other sources', but this year you will have give a detailed break-up of incomes while filing your return. A drop down menu has been given in the ITR form to select and choose the type s of income received by you.
Pockets on Facebook. Customer Care Stay Connected. Report an Unauthorized Transaction Suspicious mail. Support Center. Locate our branches and ATMs. Income by way of renting out of machinery, plant or furniture along with building under Section 56 2 iii. Interest that can be charged outside India on which taxes have not been paid or deducted at source.
However, the basis of charge does not get affected by the method of accounting in case of income from interest on compensation or on enhanced compensation and dividend income. You can save tax on FDs by opting for FDs which have a 5-year lock-in period.
If you invest an amount of up to Rs. However, the interest is taxable like a regular FD. If your annual income is more than Rs. If your income is less than Rs. Income from Assets Older adults also receive income from savings accounts, certificates of deposit, stocks and bonds, retirement accounts such as k s and IRAsand other investments. Looking for help with your retirement plan? What's your story? Roadmap to retirement Let our roadmap to helpful information about retirement plans for private-sector workers put you on the path toward a secure retirement.
Get E-mail Updates Subscribe Now. It can be measured by various methods, including the Lorenz curve and the Gini coefficient. Many economists argue that certain amounts of inequality are necessary and desirable but that excessive inequality leads to efficiency problems and social injustice. National income, measured by statistics such as net measuring of national income income NNImeasures the total income of individuals, corporations, and government in the economy.
For more information see Measures of national income and output. Throughout history, many have written about the impact of income on morality and women s rights essay topics. Some scholars have come to the conclusion that material progress and prosperity, as manifested in continuous income growth at both the individual and the national level, provide the indispensable foundation for sustaining any kind of morality.
This argument was explicitly given by Adam Smith in his Theory of Moral Sentiments [ citation needed ]and has more recently been developed by Harvard economist Benjamin Friedman in his book The Moral Consequences of Economic Growth. The International Accounting Standards Board IASB uses the following measuring of national income "Income is increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.
John Hicks used "I" for income, but Keynes wrote to him in" after trying both, I believe it is easier to use Y for income and I for investment. From Wikipedia, the free encyclopedia. Dividend Dividends, other than the dividends referred to in section O. Winning from Lotteries, etc. Employees' Contribution towards Staff Welfare Scheme Any sum received by the assessee from his employees as contribution to any provident fund, or any other welfare fund for the employees provided it is not taxable under the head 'Profits and Gains of Business or Profession'.
Rental Income of Machinery, Plant or Furniture Income from machinery, plant or furniture belonging to the assessee and let on hire, provided the income is not chargeable to Income-tax under the head profits and gains of business or profession.
Rental income of leting out of Plant, Machinery or Furniture along with letting out of Building and the two lettings are not separable Where the assessee lets on hire, the machinery, plant or furniture belonging to him and also buildings, and letting of buildings, is inseparable from the letting of the said machinery, plant or furniture, the income from such letting, if it is not chargeable to income-tax under the head profits and gains of business or profession.