Page 59 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes
Example: The net worth of company ABC is ` 30 crores and the total assets are worth
` 10 crores. What is the proprietary ratio of the fi rm?
Solution:

Owners' Funds or Equity or Shareholders' Funds 30
Proprietary Ratio = = = 31
:
Total assets s 10
The ratio shows that the firm is in quite a good fi nancial position.

4.4.3 Fixed Assets Ratio

The ratio establishes the relationship in between the fixed assets and long-term source of funds.

Whatever the source of long-term funds raised should be used for the acquisition of long-term

assets; it means that the total volume of fixed assets should be equivalent to the volume of long
term funds, i.e. the ratio should be equal to 1.
Fixed Assets Ratio = Shareholders' Funds + Outsiders' Funds
Net Fixed Assets

If the ratio is lesser than one means that the firm made use of the short-term fund for the acquisition
of long-term assets. If the ratio is greater than one means that the acquired fixed assets are lesser

in quantum than that of the long-term funds raised for the purpose. In other words, the fi rm
makes use of the excessive funds for the built of current assets.
!
Caution Standard norm of the ratio: The ideal norm of the ratio is 1:1, which means
that the long-term funds raised are utilised for the acquisition of long-term assets of the
enterprise.
It facilitates to understand obviously about the over capitalization or under capitalization of the
assets of the enterprise.

Example: The networth of company ABC is ` 30 crores and the net fixed assets are worth

` 100 crores. If the outsider’s funds are worth ` 70 crores, what is the fixed assets ratio of the

fi rm?
Solution:
Shareholders' Funds + Outsiders' Funds 30 +70 100
+
Fixed Assets Ratio = = = = : 11
Net Fixed Assets 100 100
Since the ratio is 1:1, it shows that the firm raises the long term funds utilises them only for the

acquisition of long term assets of the enterprise.
4.4.4 Coverage Ratios

These ratios are computed to know the solvency of the firm in making the periodical payment

of interest and preference dividends. The interest and preference dividends are to be paid
irrespective of the earnings available in the hands of the firm. In other words, these are known as

fixed commitment charge of the fi rm.

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