ACCA Financial Management (F9) Certification Practice Exam

Which formula calculates Capital Employed?

1. Total assets − Current liabilities

2. Shareholders' funds + Total liabilities

3. Fixed Assets + Working Capital

4. Current assets + Current liabilities

The correct answer is: Total assets − Current liabilities

The correct choice for calculating Capital Employed is obtained by using the formula Total assets minus Current liabilities. This method accurately reflects the net assets available for the company's operations, as Capital Employed represents the total amount of capital that is utilized in the business to generate profits. When calculating Capital Employed through total assets, you account for all resources owned by the company, including both current and non-current assets. Subsequently, subtracting current liabilities ensures that only the long-term financing (equity and long-term liabilities) is considered, providing a clearer picture of the capital employed in the business. This approach highlights the resources used to generate revenue while excluding short-term obligations that need to be settled within a year, aligning with the principle that Capital Employed focuses on long-term funding. Meanwhile, the other options may misrepresent the calculation of Capital Employed. For instance, combining shareholders' funds with total liabilities does not take into account the deduction of current liabilities, which is essential for accurate capital measurement. Similarly, calculating using fixed assets and working capital or current assets plus current liabilities does not align with the standard definition of Capital Employed. The correct calculation emphasizes the importance of understanding how long-term capital is structured in relation to utilized resources.