O Level Accounting (7707)•7707/12/M/J/23
Explanation
Return on Capital Employed (ROCE) for T Limited
Steps:
- Obtain operating profit of £1,377,000 from the income statement.
- Calculate capital employed as total assets (£8,000,000) minus current liabilities (£1,000,000), yielding £7,000,000.
- Apply ROCE formula: (Operating profit ÷ Capital employed) × 100.
- Compute: (£1,377,000 ÷ £7,000,000) × 100 = 13.77%.
Why B is correct:
- ROCE measures profitability relative to capital invested, using operating profit and capital employed (assets - current liabilities) per standard accounting formula.
Why the others are wrong:
- A uses net profit instead of operating profit, understating efficiency.
- C divides by total assets alone, ignoring liability adjustments.
- D applies sales revenue in numerator, confusing ROCE with another ratio.
Final answer: B
Topic: Calculation and understanding of accounting ratios
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