How to approach it
- For each decision, first state the accounting effect on the statements: which assets, liabilities, equity and P&L lines change.
- Then take each ratio and say which part (numerator or denominator) moves and in which direction, and why.
- Present as a grid of decisions × ratios with a reason in each cell.
Key rules to apply
- Equity-accounted associate: non-current asset; share of profit sits below operating profit in many formats.
- Long lease: right-of-use asset and lease liability on balance sheet; expense becomes depreciation + interest.
- Revaluation: higher assets and equity; higher depreciation lowers profit.
Common mistakes
Drawn from the examiners' comments for this sitting (summarised in our words) and from typical errors on this topic.
- Only stating 'increase' or 'decrease' without reasons (examiners' point).
- Missing the higher depreciation after revaluation.
- Ignoring balance sheet effects on current ratio, gearing and asset turnover.
Similar question with worked solution
Written by us with our own numbers; it tests the same skills as Q5 without copying it.
Original practice question
Revaluation and its ratio effects
Equity Rs 1,000m, debt Rs 400m, PBIT Rs 200m, revenue Rs 2,000m, interest Rs 40m. The company revalues PPE upwards by Rs 300m, adding Rs 15m a year of depreciation.
Required: Show the effect on gearing, ROCE, asset turnover and interest cover.
Worked solution
| Ratio | Before | After |
|---|---|---|
| Gearing (debt ÷ equity) | 40.0% | 400 ÷ 1,300 = 30.8% |
| ROCE (PBIT ÷ (equity + debt)) | 200 ÷ 1,400 = 14.3% | 185 ÷ 1,700 = 10.9% |
| Asset turnover (revenue ÷ capital employed) | 1.43 | 1.18 |
| Interest cover | 5.0× | 185 ÷ 40 = 4.6× |
Answer: Gearing looks better; ROCE, asset turnover and interest cover all look worse, with no change in cash.