Chapter 6, Problem 6.21P

To determine

Concept Introduction:

Revenue and Capital Expenditure:

Expenses are categorized in two types for the purpose of recording, Revenue expenses and Capital Expenses. Revenue expenses are day to day operating expenses, whereas the capital expenses are the expenses incurred in acquisition and improvement of assets. The expenses which are incurred in acquisition and improvement of assets are capitalized to the cost of the assets.

Return on Investment (ROI): The return on investment is a profitability ratio that measures the percentage of profit earned on the investment made. It is calculated with the help of following formula:

  $\text{Return on investment = }\frac{\text{Net Operating Income}}{\text{Average operating assets}}$

Requirement-a:

To Calculate:

The Operating income that should have been reported for the current year

To determine

Concept Introduction:

Revenue and Capital Expenditure:

Expenses are categorized in two types for the purpose of recording, Revenue expenses and Capital Expenses. Revenue expenses are day to day operating expenses, whereas the capital expenses are the expenses incurred in acquisition and improvement of assets. The expenses which are incurred in acquisition and improvement of assets are capitalized to the cost of the assets.

Return on Investment (ROI): The return on investment is a profitability ratio that measures the percentage of profit earned on the investment made. It is calculated with the help of following formula:

  $\text{Return on investment = }\frac{\text{Net Operating Income}}{\text{Average operating assets}}$

Requirement-b:

To Calculate:

The ROI using the incorrect and correct net operating income

To determine

Concept Introduction:

Revenue and Capital Expenditure:

Expenses are categorized in two types for the purpose of recording, Revenue expenses and Capital Expenses. Revenue expenses are day to day operating expenses, whereas the capital expenses are the expenses incurred in acquisition and improvement of assets. The expenses which are incurred in acquisition and improvement of assets are capitalized to the cost of the assets.

Return on Investment (ROI): The return on investment is a profitability ratio that measures the percentage of profit earned on the investment made. It is calculated with the help of following formula:

  $\text{Return on investment = }\frac{\text{Net Operating Income}}{\text{Average operating assets}}$

Requirement-c:

To Indicate:

The effect of error in future years ROI if not corrected