ExpertMedium1 markShort Answer
ACCA · Question 56 · Interpretation of financial statements
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Using the unadjusted draft figures, calculate the Return on Capital Employed (ROCE). (Assume draft net profit equals Profit Before Interest and Tax. Calculate as PBIT / (Total Equity + Long-term Debt) and enter as a percentage to one decimal place, e.g., 15.5)
Section B - Case 2: Single Entity Accounts & Ratio Analysis
*Scenario: Horizon Wind Farms Ltd has prepared draft financial statements for the year ended 31 December 20X8. The draft net profit is $850,000. Draft Revenue is $4,000,000 and Cost of Sales is $2,200,000. The following adjustments have not yet been processed:
- Depreciation on new turbines of $50,000 was omitted.
- An annual insurance premium of $12,000 paid on 1 July 20X8 was expensed in full.
- Closing inventory was overvalued by $30,000.
- An irrecoverable debt of $15,000 needs to be written off.
Equity comprises Share capital $1,000,000 and Retained earnings $2,000,000. There is a long-term loan of $1,500,000.*
Using the unadjusted draft figures, calculate the Return on Capital Employed (ROCE). (Assume draft net profit equals Profit Before Interest and Tax. Calculate as PBIT / (Total Equity + Long-term Debt) and enter as a percentage to one decimal place, e.g., 15.5)
How to approach this question
ROCE = PBIT / Capital Employed. Capital Employed = Total Equity + Non-Current Liabilities. Use the draft figures provided.
Full Answer
Draft PBIT = $850,000.
Capital Employed = Share capital ($1,000,000) + Retained earnings ($2,000,000) + Long-term loan ($1,500,000) = $4,500,000.
ROCE = ($850,000 / $4,500,000) * 100 = 18.888...% = 18.9%.
Common mistakes
Forgetting to include the long-term loan in Capital Employed.
Practice the full ACCA FA — Financial Accounting Practice Exam 1
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