Looking at ICB L3 Manual exam Oct 09 past paper. A Q asks about gearing, are given extracts for BS, ie amounts for: issued ord share capital, share prem acc, revenue reserves = total equity, then pref shares, then debentures. All totalled up at bottom (as "total assets less total liabs", ie capital employed).
You then have to redraft the BS with adjusted figures for events given, ie further issues for ord share at premium, pref shares and debentures.
Then you have to calc the co's gearing before and after the changes.
I did the answer then went to check it in the answerbook given and found the answer given was about the effect on cashflow (eh?). Obviously a mistake so I emailed ICB. They replied with what they THINK is the answer (I'm surprised they can't be definite as they set the exam). They say gearing = debenture / cap emp.
My text book says gearing = debenture+pref shares / cap emp, which of course gives different answer. I also understand, from searching the web, that there are a number of interpretations of "gearing", so I need to know precisely the answer that ICB are looking for.
Can anyone give me a third opinion? Maybe the definition from a correspondence/ home study course geared ('scuse the pun) to ICB L3M exam? Thanks.
Phil
-- Edited by PhilMcTankup on Friday 1st of October 2010 04:10:01 PM
-- Edited by PhilMcTankup on Friday 1st of October 2010 04:11:45 PM
for students gearing is one of those ratio's that doesn't really play fair.
It's certainly not an exact science. Look at two different text books and you'll have two different ways of calculating it! (and that's not just the difference between things like operating and financial gearing).
Within a company of course there must be consistency of calculation between accounting periods but two companies can calculate what seems on the face of it to be the same ratio in different way's!
Rather than tie you up in circles with gearing theory and it's effect on cashflow I'll let the Association of Chartered Certified Accountants (ACCA) do it for me.
Here's the address of the article that you are interested in :
http://www.accaglobal.com/archive/2888864/31074
Have a read through this article which has stood the test of time for accountants in training for the past ten years. I hope that it makes gearing clearer and especially emphasis's the knowledge that often in accounting there is more than one right answer.
Hope that this helps,
Shaun.
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
A definition from ICB training material is just what I needed to know, so thanks for that Bill. It is worryng that ICB told me a wrong answer, I'll email them back so they know for similar future queries.
I will use your link too, Shaun, to get a wider perspective.
I'll have money on it that you've just checked out that ACCA link.
Actually, I should read that page again myself as last time I went down that path was with the old performance management paper a couple of years back.
Currently in work I'm playing with Variances rather than ratio's so I'm thinking time for a quick refresher.
How's life with you? I've noticed that there's a few more newbies starting in the west country, does this mean that's you've had to invest in a new sniper rifle?
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Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
That's ok then Bill. If you had said it was Home Learning College's material I would have been a bit worried judging by awful experiences recounted elsewhere.
Yes, this is the formula to use for L3M (and you should know having just passed L3M with distinction )
I have to confess that when I posted the original question on 1st Oct, I had only referred to the mock paper answers on screen. When I printed it off some time later, I found another page with the missing info, sent email to ICB apologising, very embarrassing
)
