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JB Co manufactures and sells car radios. Below is a summary of the financial statements for the
business for 20X6:
20X6
$’000
Sales 2,540
Cost of sales 1,425
Expenses 600
Interest 11
Share capital and reserves 2400
Long term loan 250
Non-current assets 1650
Receivables 347
Inventory 180
Payables 318
Bank balance 36
(a) Complete the table below for performance measures. my question is, how come interest of 11 was not included in any of the calculations? and when should I charge interest as a liability or an asset. is it true that Capital employed does not consist of interest charge e.g (long term loan)You have not said what calculations were required!!!
Interest is never included in capital employed. Capital employed is share capital and reserves plus long term loans. (Interest is an expense – not an asset or a liability).
The most important measure is Return on Capital Employed, which is defined as the profit before interest and tax expressed as a percentage of the capital employed.
All of the measures are explained in detail in my free lectures – I really do suggest that you watch them.
1:Thank you sir, I actually thought interest in this question is a current liability to calculate current ratio. what makes it so unique in this question that I should not include it as an asset or liability to calculating current ratio. 2: Sir, Investment Appraisal, discount factor is 12% number of years is 2 capital outlay is $24,000 profits is $5000 is (1+0.12)^-2=0.797X the profit $5000 means we are finding the principle of the $5000 profit. then why deduct the capital invested of $24,000. this doesn’t make sense to me. why deduct capital invested of $24,000 from principle invested of $$3985 to find NPV?
1. There is nothing unique – interest is an expense, not an asset or a liability.
2. This has nothing to do with performance measurement – you must start a new thread when it is a new topic.
The NPV is the PV of the future receipts less the initial cost.Again – you have obviously not watched my free lectures. You cannot expect me to answer your questions if you are not prepared to watch the lectures!
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