ACCA Applied Knowledge · Financial Accounting · Ratios
Delta Co has equity of $600,000 (including all reserves), a 6% loan note of $200,000 repayable in 2033 and a bank overdraft of $50,000. Using the definition of gearing as non-current liabilities divided by equity (debt/equity), what is the gearing ratio?
Gearing on a debt/equity basis is $200,000 divided by $600,000, giving 33.3%. Only the long-term loan note counts as debt here; the overdraft is a current liability and is excluded under the stated definition.
- A33.3%Correct
- B41.7%
- C25.0%
- D8.3%
Explanation
Debt/equity uses long-term interest-bearing borrowings: $200,000 / $600,000 = 33.3%. The overdraft is repayable on demand and is treated as a current liability, so including it gives 41.7%, which is wrong under this definition. 25% uses debt over debt plus equity with the wrong base.
Did you get it right without looking?
One question tells you little. A timed set on Ratios shows your real accuracy, how long you take and where you lose marks.
More Ratios questions
- Which of the following best describes the main purpose of calculating ratios from a company's financial statements?
- Which of the following is a recognised limitation of using ratio analysis to assess the performance of a single company?
- Dunmore Co has 5,000,000 ordinary shares in issue. Profit after tax is $2,000,000 and the P/E ratio is 15. What is the market capitalisation…
- Zeta Co reported revenue of $800,000 and gross profit of $200,000 in the year just ended. Last year, revenue was $600,000 and gross profit w…
- When writing a report interpreting a company's ratios for a shareholder, which approach is most appropriate?
- Dunmore Co has cost of sales of $730,000, closing inventory of $120,000 and closing trade payables of $100,000. All purchases are on credit …