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Ratio analysis

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA MA – FIA FMA › Ratio analysis

  • This topic has 3 replies, 2 voices, and was last updated 3 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • October 28, 2021 at 12:20 am #639265
    SukainaKamar
    Participant
    • Topics: 20
    • Replies: 20
    • ☆

    Hello sir pls help me analyse my problem below

    QN1) $’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 180

    ROCE: 1250(calculated) /4000 *100= 31.25%
    Asset turnover: 3500/4000= 0.875times.

    Qn2) $’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

    ROCE: 515/ (36+180+347+1650-318) *100= 27.18%
    Asset turnover: 2540/(36+180+347+1650-318) = 1.34 times.

    My question why is it that in question two the capital employed was calculated using the way shown for qn 2 rather than just simply adding the share capital and reserves and long term loan just like done in question 1 when calculating ROCE and Asset turnover?
    how will I know what method to use on a particular question? this is from the BPP kit.

    Help needed,
    kindly,
    Sukaina

    October 28, 2021 at 8:13 am #639283
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54681
    • ☆☆☆☆☆

    These questions are a big mistake by BPP.

    You will know from your study of early chapters in our free lecture notes that the long-term capital is the equity (share capital + reserves) plus non-current liabilities, and that this will always be equal to total assets (non-current + current) less current liabilities.

    Therefore depending on how the information is given in an exam question, either approach is valid (and both give the same answer). The information given in these questions is simply not possible because the total long-term capital is not equal to the total assets less the current liabilities.

    In almost all exam questions, the quickest approach is simply to take the total long-term capital (shares capital + reserves plus non-current liabilities).

    October 28, 2021 at 7:59 pm #639344
    SukainaKamar
    Participant
    • Topics: 20
    • Replies: 20
    • ☆

    yes indeed, I was confused to see why they don’t add up to give the same answers either way.
    Thank you for assuring I wasn’t going wrong anywhere and the problem was in the question.
    Kind regards
    Sukaina.

    October 29, 2021 at 7:37 am #639361
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54681
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 4 posts - 1 through 4 (of 4 total)
  • The topic ‘Ratio analysis’ is closed to new replies.

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