VCE Accounting Unit 4

1. 22.10
RETURN ON OWNER’S
INVESTMENT (ROI)

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Return on Owner’s Investment:
 ROA measures the return provided on the Capital invested in
the business by the owner
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)
Return on Owner’s
Investment (ROI)
Net Profit
Average Capital
=
6,300
70,000
= = 9.0%
$
Net Profit 6,300
Average Owner’s Equity 70,000
$
Net Profit 6,300
Average Owner’s Equity 70,000
$
Net Profit 6,300
Average Owner’s Equity 70,000

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)
Business
$0.09 of
Net Profit
What does this mean?
For every $1 of Capital
invested by the owner,
the business earns a
Net Profit of 9 cents
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
Return on Owner’s
Investment (ROI)
Net Profit
Average Capital
=
6,300
70,000
= = 9.0%

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Return on Owner’s Investment:
 ROI is very important in making investment decisions
 People can invest their capital in many different things to earn
a return, e.g.
 A small business
 Bank term deposits
 Shares
 Property
 Gold
• ROI allows the owner to
compare the return of
alternative investments
• What else could they invest
their money in?
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Return on Owner’s Investment: interpreting the trend,,,
Return on
Investment (RO1)
= 9%<
For every $1 of Capital
invested, the firm is generating
9 cents in Net Profit
<Return on
Investment (RO1)
= 5%
For every $1 of Capital
invested, the firm is generating
5 cents in Net Profit
Return on
Investment (RO1)
= 15%
For every $1 of Capital
invested, the firm is generating
15 cents in Net Profit
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)
$0.09
Net
Profit
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
$0.05
Net
Profit
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
The firm is earning less Net
Profit for each $1 of Capital
$0.15
Net
Profit
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
Balance Sheet
Assets Liabilities
Owner’s Eq.
$1
The firm is earning more Net
Profit for each $1 of Capital

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Return on Owner’s Investment: how to improve it…
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)
Last year… Option 1:  Net Profit
$
Net Profit 15,000
Average Capital 100,000
Net Profit
Average Capital
Return on
Investment =
15,000
100,000
=
15.0%=
$
Net Profit 30,000
Average Total Capital 100,000
$
Net Profit 15,000
Average Capital 100,000
$
Net Profit 20,000
Average Total Capital 100,000
$
Net Profit 20,000
Average Capital 100,000
Net Profit
Average Capital
Return on
Investment =
20,000
100,000
=
20.0%=

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Return on Owner’s Investment: how to improve it…
22.10 RETURN ON OWNER’S
INVESTMENT (ROI)
Last year… Option 2:  Average Capital
$
Net Profit 15,000
Average Total Capital 100,000
Net Profit
Average Capital
Return on
Investment =
15,000
100,000
=
15.0%=
$
Net Profit 30,000
Average Total Capital 100,000
$
Net Profit 15,000
Average Total Capital 100,000
$
Net Profit 30,000
Average Total Capital 80,000
$
Net Profit 15,000
Average Total Capital 80,000
Net Profit
Average Capital
Return on
Investment =
15,000
80,000
=
18.7%=

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ17 X
Ex22.4 X
Ex22.5 X