The gearing ratio is calculated using the formula: Debt / (Debt + Equity). This measures the proportion of a company's assets that are financed by debt. Using the provided data, Debt is the non-current loan (150) and Equity is total equity (850).

Gearing = 150 / (150 + 850) = 150 / 1,000 = 15%.

The interest cover ratio is calculated as: Operating Profit / Finance Cost. This indicates a company's ability to meet its interest payments. From the income statement, Operating Profit is 240 and Finance Cost is 40.

Interest Cover = 240 / 40 = 6.

Therefore, the correct gearing is 15% and the interest cover is 6.

B. The gearing calculation is incorrect. The ratio of debt to total capital employed (debt + equity) is 15%, not 16%.

C. The interest cover calculation is incorrect. The ratio of operating profit to finance cost is 6, not 4.

D. Both the gearing and interest cover calculations are incorrect based on the provided financial data and standard formulas.

1. Atrill

P. (2020). Financial Accounting for Decision Makers (10th ed.). Pearson. In Chapter 10

"Measuring and reporting financial performance

" the gearing ratio is defined as 'Long-term (non-current) liabilities / (Shareholders’ funds + Long-term (non-current) liabilities) × 100' (p. 369)

and the interest cover ratio is defined as 'Operating profit / Interest payable' (p. 367). Applying these formulas to the question's data yields 15% and 6

respectively.

2. Weetman

P. (2019). Financial Accounting: An Introduction (8th ed.). Pearson. Chapter 13

"Interpretation of financial statements

" presents the gearing ratio as 'non-current liabilities as a percentage of shareholders’ funds plus non-current liabilities' (Section 13.5

p. 465) and interest cover as 'operating profit/interest payable' (Section 13.4

p. 462). These definitions support the calculations for answer A.

3. Chartered Institute of Management Accountants. (2017). CIMA Official Terminology. CIMA Publishing. The official terminology defines interest cover as "profit before interest and tax divided by interest charges" and gearing as "the relationship

or ratio

of debt finance to equity finance." The formula Debt/(Debt+Equity) is a standard representation of this relationship used in the CIMA syllabus.