Sir, there is two gearing ratio. 1. debt/EQUITY. 2.DEBT/DEBT+EQUITY,
How we know which ratio is required in question, as in question 4 the first ratio is required.

sir i have a confusion. as gearing is also measured by the formula Total assets-current liabilities. in Qs 5 as we write of inventory it results in decrease of total assets so gearing should decrease…then why is the correct answer increasing ?

Gearing is not measured as total assets minus current liabilities!!

It is measured as long-term debt divided by equity plus long-term debt. Equity plus long-term debt is equal to total assets less current liabilities. If inventory is written off then total assets less current liabilities decreases. Since this is the denominator in the formula for the gearing ratio, the gearing ratio will increase.

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zinmartun says

Sir.., I am confusing about Q3. ROCE

ROCE = Profit before interest and tax/ Capital Employed

So

PBIT/CE = Asset Turnover X GP Margin

PBIT/CE = Sale/ CE X Gross profit (PBIT)/ Sale

So.. should use gross profit right..?

please kindly let me know why use net profit margin. Thank so much in advance

John Moffat says

The net profit for management purposes is the profit before interest and tax. I explain why this is the case in my free lectures on this.

rokhan says

Sir, there is two gearing ratio. 1. debt/EQUITY. 2.DEBT/DEBT+EQUITY,

How we know which ratio is required in question, as in question 4 the first ratio is required.

John Moffat says

Question 4 does not require the first ratio. If there is more debt then the gearing will always increase whichever of the two measures is used.

If in the exam you are required to actually calculate the ratio then the question will make it clear which way it is to be measured.

rokhan says

THANK YOU SIR.

kingSuper says

Sir, may I ask what does it meant by written off inventory?I was quite confused about that.

Thanks in advance.

John Moffat says

Writing off inventory is reducing its value to zero (presumably because it was no longer fit to be sold).

rosscraven1 says

Do we get these ratios on a formula sheet during the exam?

aputu says

no please

John Moffat says

No you don’t. The formulae that you are given in the exam are on the formula sheet that is printed near the front of our free lecture notes.

alimohsinraza says

sir i have a confusion. as gearing is also measured by the formula Total assets-current liabilities. in Qs 5 as we write of inventory it results in decrease of total assets so gearing should decrease…then why is the correct answer increasing ?

John Moffat says

Gearing is not measured as total assets minus current liabilities!!

It is measured as long-term debt divided by equity plus long-term debt. Equity plus long-term debt is equal to total assets less current liabilities. If inventory is written off then total assets less current liabilities decreases. Since this is the denominator in the formula for the gearing ratio, the gearing ratio will increase.

annavera says

Write off inventory question Nr 5 – The correct answer is ‘Increase Gearing Ratio’.

Please can you advise how write off inventory can influence gearing ratio?

leandrotorres22 says

For number 5 how does the write off of inventory increase the gearing ratio?

John Moffat says

Writing off inventory will reduce the profit, which in turn reduces the total equity. Therefore the gearing will increase.

leandrotorres22 says

Thank you for clarifying 🙂

John Moffat says

You are welcome 🙂