- This topic has 5 replies, 2 voices, and was last updated 5 years ago by
.
- Posts
Hello,
I would need your help for the following exercise about Performance Measurement:
JB Co manufactures and sells car radios. Below is a summary of the FS for the business for 20X6:
(Data expressed in $’000)
Sales: 2,540
Cost of sales: 1,425
Expenses: 600
Interest: 11
Share capital and reserves: 2,400
Long term loan: 250
Non-current assets: 1,650
Receivables: 347
Inventory: 180
Payables: 318
Bank balance: 36I am facing difficulties to compute Return on Capital Employed.
I did the following:ROCE = Operating Profit / Capital Employed x 100
Capital Employed = Share capital and reserves + long term loanWith figures:
ROCE = (2,540 – 1,425 – 600) / (2,400 + 250) x 100 = 19.43%
But actually, as per correction, we should compute the Capital Employed as below:
Capital Employed = Total assets – current liabilities = 1,650 + 347 + 180 + 36 – 318 = 1,895
Could you please help me understanding why computing Capital Employed with Share capital and reserves and Long term loan is wrong in this example while for many other exercises, we should compute ROCE this way?
Thank you in advance for your help.
Where did you find this question, because assuming you have copied it out correctly then it does not make sense.
The reason is that capital employed (i.e. share capital and reserves + long term loan) will always be equal to total assets less current liabilities. Here the two are not equal (as you have shown) and that is not possible 🙂
Thank you very much for your quick response.
This example was taken out of BPP Practice and Revision Kit (For exams 01/09/2019 to 31/08/2020)
Exercise 25.6 Page 169
The thing is that for another example, they use Share capital and reserves and Long term borrowings to compute Capital Employed. It does not make sense either.
Below the exercise 25.3 Page 166Henderson manufactures and sells active wear. Below is a summary of the financial statements for the business 20X1:
Data are expressed in $’000
Sales 3,500
Cost of sales 1,750
Expenses 500
Interest 80
Share capital and reserves 3,200
Long term borrowings 800
Non-current assets 2,800
Receivables 400
Inventory 250
Payables 180Capital Employed = Share capital and reserves + long term borrowings = 3,200 + 800 = 4,000
or
Capital Employed = Total assets – current liabilities = 2,800 + 400 + 250 – 180 = 3,270Could you please confirm they this case is similar to the one already mentionned?
Thank you again for your time/help.
This is very poor of BPP and I will contact them about both these questions.
Always, the capital employed is either the share capital plus reserves plus long-term liabilities, or alternatively the total assets less the current liabilities – the two will always be the same (25.8 is an example of what I mean).
This will not be a problem in the real exam 🙂
- The topic ‘Performance Measurement’ is closed to new replies.