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Hi,
My question is the following.
If we have capital employed both at the beginning of the year and at the end of the year, which one do we need to use for RI calculation and why.Thanks a lot
I will answer you, even though you have not asked in the Ask the Tutor Forum 🙂
Firstly, in practice there is no rule – you do whatever you think is more sensible.
More sensible would be to use the capital employed at the start of the year, because it was the opening capital that earned the profits. (The closing capital employed includes the profit made during the year).
However, usually in the exam we only have the closing capital employed and in this case there is no choice. (and even if there is opening capital given, remember that if we are asked to compare this year with last year, then we can only sensibly use opening capital if we know it for both years).
If there really is enough information, then use opening capital (although the examiner would almost certainly allow answers using either – even though the final figure would obviously be different)
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