Why do you subtract assets in the associate? Since equity method is assumed the assets were never included in Colorful Concepts’ TA to begin with. I feel this questions is structurally unsound. Thoughts?
I 100% agree. I came on this forum to ask the same thing… In the answer to #6 before, it mentioned how the equity method was used - so I assume that is the case for #7 too. In that case, the only place the investment in the associate would be on the balance sheet is in the EQUITY portion. So the asset turnover ratio would be unaffected because: -Avg Assets aren’t affected -Revenue is not affected (one line item of “Net Profit” in the income statement doesn’t affect Revenue) Answer should be “A” in my opinion. Anyone else, experts, please share your thoughts - this is page 357, question 7 of Reading 26 in the CFA books.
Please look at the Nestle example discussed in great detail in the text. There they are breaking up ROE/ROA into various components due to investment from the associates. Same thing is being done here.
BS will show the Assets ( 20%) as Investments in Associates ( Single Line ). They are asking to exclude it.