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Management Accounting




                    Notes              What is the volume of current liabilities for the ratio of 1?

                                              Current liabilities =  `6,00,000  = 4,00,000
                                                                        `
                                                                 1.5
                                   Self Assessment


                                   Fill in the blanks:
                                   5.   Current assets ratio establishes the relationship in between the ……………… and current
                                       liabilities.

                                   6.   Liquid Asset = Current Assets – (……………… + Prepaid Expenses)
                                   7.   The ……………… are nothing but the current assets which can be more easily converted
                                       into cash to meet out the quick liabilities.

                                   4.4 Solvency Ratios

                                   Solvency ratios indicates company’s ability to meet its long-term liabilities. Therefore, these
                                   ratios are also called long-term solvency ratios. The long-term liability of a company comprises of
                                   debentures, long-term loans, unpaid installment on hire-purchase, and long-term creditors. The
                                   long-term creditors take interest in those ratios which highlight the long-term fi nancial position
                                   of the company so that they may ensure regarding the repayment of their principal amount on
                                   maturity as well as regular interest on their dues. For this purpose the following solvency ratio
                                   are calculated:

                                   4.4.1 Debt-equity Ratio

                                   It is the ratio expresses the relationship between the ownership funds and the outsiders’ funds.
                                   It is more specifically highlighted that an expression of relationship in between the debt and

                                   shareholders’ funds. The debt-equity ratio can be obviously understood into two different
                                   forms:
                                   1.   Long-term debt-equity ratio
                                   2.   Total debt-equity ratio
                                   Let us understand each of them one by one.

                                   Long-term Debt-equity Ratio

                                   It is a ratio expressing the relationship in between the outsiders’ contribution through debt
                                   financial resource and shareholders’ contribution through equity share capital, preference share

                                   capital and past accumulated profits. It reveals the cover or cushion enjoyed by the firm due to


                                   the owners’ contribution over the outsiders’ contribution.
                                              Debt-equity Ratio =  Debt (Long-term Debt = Debentures/Term Loans)
                                                                              u
                                                                  Net Worth/Equity (Shareholders' Fund)

                                          Example:  The long-term debt of company ABC is ` 3 crores and the networth of the
                                   company is ` 5 crores. What is the long-term debt-equity ratio of ABC?









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