Question

Which of the following are correct formulae for determining Equity/Shareholders’ Funds?

1. Non-Current Assets + Working Capital + Non-Current Liabilities
2. Non-Current Assets + (Current Assets - Current Liabilities) - Non-Current Liabilities
3. Share Capital + Reserves and Surplus
4. Capital Employed + Debt

Choose the most appropriate based on the above statements.

Options

• C and D

• A and D

• D and B

• B and C

Answer 1

B and C

Explanation:

Formula C uses the traditional liability-side approach where Shareholders’ Funds are calculated by adding Share Capital and Reserves and Surplus. Formula B uses the asset-side approach, where Equity is found by taking Total Assets (Non-Current Assets + Current Assets) and subtracting all external liabilities (Current Liabilities + Non-Current Liabilities). Both are mathematically accurate and yield identical results. Conversely, Statement A incorrectly adds long-term liabilities, and Statement D incorrectly adds debt instead of subtracting it from Capital Employed.