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CT2 Q12.8 (Notes)

T

tommo

Member
Hi,

While attempting to calculate the Shareholder Equity Ratio, the numerator is referred to as being the total balance sheet value of the capital plus reserves, (which equals 50000 - not taking into account the retained earnings) while the solution describes the correct numerator as being the capital plus reserves plus retained earnings -

Does 'shareholder equity' refer to capital + reserves + retained earnings or just the C + R ?? The question prior to this one details the equity as being merely C + R.

Cheers,


Alun
 
Hi Alun

The shareholder equity ratio uses "share capital and reserves including retained earnings".

The ratio in the qn before that you refer to (asset gearing) also uses the same definition, ie that includes the retained earnings too.

In both cases, intangibles are deducted.

So, for both 12.7 and 12.8, for "equity" we use 50,000. This is 70,000 (of share capital and reserves and retained earnings) minus 20,000 (of intangibles). The two solutions are consistent.

I think the fact that the retained earnings are also 20,000 in this particular example may be causing the confusion?

Hope this helps
Lynn
 
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