Avg capital employed calculation

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Hardeep Singh (Querist)
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22 September 2016 Hello sir

Background :

I want to know the correct treatment of calculating 'Average Capital Employed' for the purpose of goodwill calculation by subtracting from the closing capital employed the half of profits earned during the period when the company has declared and paid dividends for the current year.

Statement:

Balance sheets of a company for consecutive two years are as follows:

Y1 Y2. Y1. Y2

capital. 70 70 assets 100. 120

P&L. 30. 50

Total. 100. 120. 100. 120

And profit and loss appropriation account for Y2 is as follows:

Equity dividend 50. Bal b/d. 30

Net profit 70

Bal c/d 50

Total. 100. 100

Note : dividend has been declared and paid

Query :

Avg. Capital employed by taking simple average of two years closing capital employed will be

(100 + 120)/2 = 110

Avg capital employed by substracting half of the profits after tax from closing working capital will be

120 - (70)/2 = 85

Please explain the difference

Thanks in anticipation

Amol S Joglekar

Amol S Joglekar (Expert)
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23 September 2016 The financial management is flooded with LOOSELY used terms.....
They are not to be taken as MATHEMATICAL figures, although expressed in terms of mathematical figure. The same should be considered as INDICATORS.
Some times average = (opening + closing ) / 2
The what to do in exam?
Write your assumption clearly...and compute accordingly....

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