CBSE Class 12 Accountancy Partnership Ratio Analysis Notes

                                                BALANCE SHEET

                                            As at 31st March, 2012

                                                    Particulars

 I. EQUITY AND LIABILITIES
 Equity Share Capital                                                3,00,000

 Preference Share Capital                                         1,00,000

 Reserves                                                                  50,000

 Profit & Loss Balance                                               65,000

 12% Mortgage Loan                                                 1,80,000

 Current Liabilities                                                      1,20,000

                                                          TOTAL              8,15,000

II. ASSETS:

 Fixed Assets                                                             4,50,000

 Share Issue Expenses                                              15,000

  Current Assets                                                         3,50,000

                                                          TOTAL              8,15,000

What conclusions do you draw from the above ratios?

SOLUTION 5.

(i) Debt Equity Ratio = Debt/Equity or Long term Loans/Shareholder's Funds

Shareholder’s Funds = Equity Share Capital + Pref. Share Capital + Reserves + P & L Balance – Share Issue Exp.

= 3,00,000 + 1,00,000 + 50,000 + 65,000 – 15,000

= 5,00,000

Mortgage Loan is Long Term Loan,

Hence, Debt Equity Ratio = 1,80,000/5,00,000 =.36 : 1

Comments: This ratio indicates what proportion of funds is provided by Longterm loans in comparison to Shareholder’s funds. Generally, the ratio should not be more than 2 : 1. Debt-Equity ratio of the above company is .36:1,

which indicates that long-term loans are only .36 in comparison to shareholder’s funds. Hence, it may be considered that the long-term financial position of the company is very sound.

(ii) Total Assets to Debt Ratio = Total Assets/Debt

                                                   = Fixed Assets+ Current Assets/Long-term Loans

                                                   = 4,50,000 + 3,50,000/1,80,000 =4.44 : 1

Comments: Total assets of this company are 4.44 times in comparison to long-term debts of the company. The higher ratio indicates the use of lower debts in financing the assets which means higher security to lenders.

(iii) Proprietary Ratio = Equity/Total Assets

                                    = Shareholder's Funds/Fixed Assets + Current Assets

                                    = 5, 00,000

                                        4, 50,000 + 3, 50,000

                                     = 0.625 or 62.5%

Comments: Shareholder’s Funds of this Company are 62.5% in comparison to total assets of the company. In other words, 62.5% of the total assets of the company are funded by equity which indicates that the long-term financial position of the company is very sound.

QUESTION 6.
From the following balance sheet and other information calculate (i) Working Capital Turnover Ratio, (ii) Debt Equity Ratio and (iii) Trade Receivables Turnover Ratio.

                                                       BALANCE SHHET

                                                   As at 31st March, 2012

                                                            Particulars

I. EQUITY AND LIABILITIES

Share Capital                                                                       2,00,000

General Reserve                                                                  80,000

Profit and Loss                                                                     1,20,000

Loan @ 15%                                                                         2,40,000

Trade Payables                                                                     1,00,000

                                                                  TOTAL                 7,40,000

II. ASSETS:

Fixed Assets                                                                          3,60,000

Inventory                                                                                80,000

Trade Receivables                                                                 1,80,000

Cash                                                                                      1,00,000

Preliminary Expenses                                                             20,000

                                                                        TOTAL            7,40,000

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