ACCA Performance Management (F5) Certification Practice Exam

Capital employed is calculated as?

1. Total assets - current liabilities

2. Total liabilities - current assets

3. Current assets + fixed assets

4. Current assets - total liabilities

The correct answer is: Total assets - current liabilities

Capital employed is a key financial metric that represents the total amount of capital that a company uses to generate profits. It is calculated as total assets minus current liabilities. This formula captures the net assets that are available for a company to work with in its operations, after accounting for short-term obligations. Total assets reflect everything that a company owns, including both current and non-current assets. Current liabilities, on the other hand, are obligations that the company needs to settle in the short term, typically within one year. By subtracting current liabilities from total assets, one obtains the long-term financing that is available for the company’s operations, which is what capital employed represents. This provides a clearer picture of the resources the company has at its disposal for generating income over the long term. Other calculations presented in the question do not accurately reflect the concept of capital employed. The other options either misinterpret the components of capital or do not align with the financial definition required to measure the capital effectively. Therefore, the first option correctly articulates the approach to calculating capital employed.