ExpertMedium2 marksMultiple Choice
ACCA · Question 11 · Analyzing Financial Statements
SECTION A
Which of the following actions would immediately improve a company's Return on Capital Employed (ROCE)?
SECTION A
Which of the following actions would immediately improve a company's Return on Capital Employed (ROCE)?
Answer options:
A.
Issuing new equity shares to hold as cash reserves.
B.
Revaluing non-current assets downwards due to an impairment.
C.
Paying off trade payables using cash.
D.
Selling excess inventory at cost to pay off a bank overdraft.
How to approach this question
Analyze the ROCE formula: Profit Before Interest and Tax (PBIT) / Capital Employed (Total Assets - Current Liabilities, or Equity + Non-Current Liabilities). Determine how each option affects the numerator and denominator.
Full Answer
D.Selling excess inventory at cost to pay off a bank overdraft.✓ Correct
ROCE is calculated as PBIT / Capital Employed. An increase in the estimated useful life of non-current assets reduces the annual depreciation charge. A lower depreciation charge increases PBIT (the numerator) while having a minimal immediate impact on Capital Employed, thereby improving the ROCE ratio.
Common mistakes
Thinking that issuing shares improves ROCE (it actually dilutes it by increasing the capital base without an immediate proportional increase in profit).
Practice the full ACCA FR — Financial Reporting Practice Exam 1
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