The most recent published results for V plc are shown below:

An analyst working for a stockbroker has taken these published results, made the adjustments shown below, and has reported his conclusion that ‘the management of V plc is destroying value’.
Analyst’s adjustments to profit before tax:

Analyst’s adjustments to summary consolidated balance sheet at 31 December

The chairman of V plc has obtained a copy of the analyst’s report.
Requirement:

(a) Explain, as management accountant of V plc, in a report to your Chairman, the principles of the approach taken by the analyst. Comment on the treatment of the specific adjustments to R&D, Advertising, Interest and Borrowings and Goodwill.

(b) Having read your report, the Chairman wishes to know which division or divisions are ‘destroying value’, when the current internal statements show satisfactory returns on investment (ROIs). The following summary statement is available:

Requirement:
Explain, with appropriate comment, in a report to the Chairman, where ‘value is being destroyed’. Your report should include:
•a statement of divisional performance;
•an explanation of any adjustments you make;
•a statement and explanation of the assumptions made; and •comment on the limitations of the answers reached.

(c) The use of ROI has often been criticized as emphasizing short-term profit, but many companies continue to use the measure. Explain the role of ROI in managing business performance, and how the potential problems of shorttermism may be overcome.

Transcribed Image Text:

Profit before tax for year ending 31 December Summary consolidated balance sheet at 31 December Fixed assets Current assets Less: Current liabilities Net current assets Total assets less current liabilities Borrowings Deferred tax provisions Net assets Capital and reserves Published (m) 13.6 35.9 137.2 (95.7) 41.5 77.4 (15.0) (7.6) 54.8 54.8