Capital employed is defined as which combination?

• A. Shareholder funds + long term debt
• B. Total assets
• C. Current liabilities
• D. Inventory plus receivables

Answer: (A)

Capital employed refers to the long-term funds used to run the business and finance its assets. It represents the sources of financing that support the company’s non-current assets and enduring operations. The standard way to express this is shareholders’ funds (equity) plus long-term debt, which shows the permanent capital backing the business. Equivalently, capital employed can be seen as total assets minus current liabilities, which aligns with equity plus long-term debt via the accounting equation.

This is why the combination of shareholder funds and long-term debt is the best description: it captures the permanent, long-duration financing that stays invested in the business, as opposed to short-term obligations or current assets. Current liabilities are short-term claims and don’t represent long-standing capital, while inventory and receivables are current assets, not the capital structure backing the business.