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ACCA Applied Knowledge · Financial Accounting · Ratios

Orwell Co has revenue of $2,400,000, and non-current assets of $800,000 at the year end. Net current assets are $400,000. Non-current assets include a building revalued upward by $200,000 at the year end, which is already included in the $800,000. Total assets less current liabilities equal the capital employed. What is the net asset turnover based on the year-end figures as given, and what effect does the revaluation have on this ratio?

Net asset turnover is revenue divided by capital employed: 2,400,000 divided by 1,200,000 gives 2.0 times. Revaluing assets upward increases capital employed, so it lowers the ratio compared with historical cost, making comparisons less consistent.

  1. A2.0 times; the revaluation reduces the ratio compared with historical costCorrect
  2. B3.0 times; the revaluation increases the ratio
  3. C2.0 times; the revaluation increases the ratio
  4. D3.0 times; the revaluation reduces the ratio compared with historical cost

Explanation

Capital employed = 800,000 + 400,000 = 1,200,000. Net asset turnover = 2,400,000 / 1,200,000 = 2.0 times. A revaluation raises assets and so the denominator, which lowers the ratio compared with historical cost (without it: 2,400,000/1,000,000 = 2.4). Option 3 uses the wrong direction of effect.

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