Gearing Ratio

HayleyM
HayleyM Registered Posts: 63 Regular contributor ⭐
in AAT Level 4 (Level 8 in Scotland)
Hi,

I am now finally on Section 2!! :) Since my cry for help on Tuesday night, I have managed to learn all of the statements and calculations by heart and can complete the whole of section one (apart from a few theory bits) with no problems!! Ok I will stop bragging now..... just really really pleased with myself... lol

Does anyone know the actual calculation for the Gearing Ratio? Everywhere I look it seems to be a different calculation!!

Thanks in advance!

Comments

  • taskey
    taskey Registered Posts: 1,800 Beyond epic contributor 🧙‍♂️
    well done, i am still struggling on section 1 but if i keep going over it again and again it will stick (i hope)

    any tips??

    lol

    Tracy
  • HayleyM
    HayleyM Registered Posts: 63 Regular contributor ⭐
    taskey wrote: »
    well done, i am still struggling on section 1 but if i keep going over it again and again it will stick (i hope)

    any tips??

    lol

    Tracy

    I just went through one of the past exam papers in my textbook and just used to answers to learn how to do it. If that makes sense? I made tons of notes and then it has just sort of stuck really!! Starting to feel quite chilled out about DFS now :)
    You will be fine!! Good Luck!!
  • Faraa
    Faraa Registered Posts: 9 New contributor 🐸
    Well done Hayley,
    I'm still trying to get it all in my head...
    Gearing is the relationship between equity and debt.I think there is more than 1 calculation but we use
    Longterm Liablities/Capital+Reserves+Longterm Liabilities. Hope this helps, good luck!
  • HayleyM
    HayleyM Registered Posts: 63 Regular contributor ⭐
    Faraa wrote: »
    Well done Hayley,
    I'm still trying to get it all in my head...
    Gearing is the relationship between equity and debt.I think there is more than 1 calculation but we use
    Longterm Liablities/Capital+Reserves+Longterm Liabilities. Hope this helps, good luck!

    Hi,
    Thanks! That is the one I have been using. I was just hoping that I hadn't been doing it wrong all this time as it would be hard to change. Old habits die hard lol.
    Thanks again :)
  • noodles
    noodles Registered Posts: 308 Dedicated contributor 🦉
    I think that it is important to know both gearing ratios'
    debt/equity and also debt/equity+debt
    I failed the exam last year so retaking it in June but they did expect us to know both gearing's and to calculate which one was being used by another company when comparing data. My question is, why do you not add preference shares into the equity, I can not understand why you take ordinary shares and share premium but not preference, can anyone help????
  • reddwarf
    reddwarf Registered Posts: 528 Epic contributor 🐘
    I've got a different accounts book by David Cox where it states gearing ratio as;

    preference share capital + long term loans, including debentures /ordinary share capital + reserves x 100%

    I don't think you'd lose any marks for using above and at least it shows you know what you are talking about! I hope/think the exam will give clues are to which you are to use (i.e. no preference share figure!). But if you have to explain the ratio you say in your view you should include pref shares. I think Steve Collings said don't sit on the fence! You may even gain some marks!!

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