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Ratio analysis

SSukaina4y ago
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
John MoffatJohn MoffatTutor4y ago#1
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).
SSukaina4y ago#2
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.
John MoffatJohn MoffatTutor4y ago#3
You are welcome :-)
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