In this workout, we're asked to calculate invested capital and capital employed using a company's balance sheet. Now we can see that this is a pretty standard balance sheet. Their assets include intangible assets, property, plant and equipment, inventory, accounts receivable and cash. On the other side of the balance sheet, they have accounts payable, debt and shareholder's equity. Let's start by calculating invested capital. This reflects the source of funds for the business. Therefore, it's gonna need to include the debt balance, that's the capital invested by debt investors, and shareholders equity, that's the capital I invested by equity investors. So let's grab those first of all.

However, let's pause there. The cash sitting in the balance sheet also represents a source of funds. It's not currently tied up in the business so it could be used to pay down debt or a dividend tomorrow, if management wanted. So we'll deduct the cash from the debt and the equity balance and this gives us our invested capital.

And the invested capital is 100. Now let's calculate capital employed. This reflects how the capital invested in the business has been employed by management for generating operating profits. So capital employed is essentially all of the operational assets and liabilities in the balance sheet. So clearly we're gonna need to include intangible assets, property, plant and equipment, inventory and accounts receivable. So let's grab those now.

However, we need to remember that accounts payable are operational liabilities. That is that they're part of the operations which generate the operating profits of the business. So we'll deduct accounts payable from our capital employed.

So this gives us capital employed of 100, which is exactly the same as the invested capital. This is what we should expect since the company's source of funds is equal to the company's use of funds. Therefore when we're calculating return on invested capital, we can either use invested capital or capital employed and should end up with the same result.