On Page 357, problem # 7…I was under the impression that for Inv w. Associates, you do not factor a sub’s assets or sales, so why would asset turnover change when you exclude the sub? what am i missing?
The question may be referring to Quick Ratio with CA and CL. In which case CA will down and the investment will be long term asset/investment. That’s the way ive seen it tested
You are provided information for the Beginning and End Asset balance. for the associate. which has to be removed. They do the same in the Nestle example while doing the ROE decomposition as well.
You are trying to value the firm without the effects of the associate. You find the average assets of the associate and then remove those from the total assets of Colorful Concepts. Just by looking at the equation of Asset Turnover=Rev/Assets…you can understand that the assets will decrease therefore increaseing the asset turnover ratio. There will be no change in revenue due to it being 20%-using the equity method.
im sure im just confused, but i was under the impression that for associates, you always exclude assets anyway, and you just report your investment as a one line item…so still not sure why you have to remove these assets…