Pev DEC 06 - Section 2

System
System Posts: 100,534 🤖 Admin 🤖
edited 10:27AM in AAT student discussion
Re Task 2.2 (b)

Cannot understand why when calculating the ROCE the long term liability of £800,000 is not deducted as I thought that ROCE calculation was

Operting profit
Fixed + net current assets


Help!!!!

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Pev DEC 06 - Section 2

    Capital Employed includes long term liabilities

    Your definition is correct:

    Operting profit
    Fixed + net current assets

    Look at Fixed + net current assets - no long-term liability is taken off.

    Your managers had the long-term liabilities available to use to generate profit so their success in generating profits from the total capital at their disposal (the ROCE calculation and %) should take account of the long-term loans.

    sandy.hood@chichester.ac.uk
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Pev DEC 06 - Section 2

    If that is the case then why isnt the equation

    operating profit
    fixed + net assets.

    Think I am getting myself confused somewhere along the line, is it possible to do too much revision I ask myself? Best not answer that until we get results!
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Pev DEC 06 - Section 2

    Stop panicing.

    And think
    What are net assets?

    Fixed assets plus net current assets less long term liabilities.

    So if you say fixed assets plus net assets there is some double counting and
    you aren't really looking at what the managers have at their disposal

    Do you agree that
    Fixed assets + net current assets = Shareholders' funds + long term loans

    If you do then look at the balance sheet and see that these are two ways of getting the same figure
    and this figure is the total amount invested in the business and at the disposal of the managers, so we should look at how well they use it to make profits.

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