Page 63 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Equity dividends 0.525

Reserves at the close of year 2.000
Calculate the following ratios – (a) Current ratio, (b) Quick ratio, (c) Debt-equity ratio, (d) Interest
coverage, (e) Fixed charge coverage.
Solution:
(a) Current Ratio:

,
,
Current assets 3 75 000
= = 227 1 :
.
,
,
Current liabilities 1 65 000
(b) Quick Ratio:
−
,
,
Current assets Inventories = 2 00 000 = 121 1 :

.
−
,
,
Current liabilities Bank overdrafft 1 65 000
(c) Debt-Equity Ratio:
Long-term debt 3,50,000
= = 0.467:1
Shareholders funds 7,50,000
(d) Interest Coverage:
+
,
,
,
,
,
PBIDT = 1 26 000 + 47 000 1 26 000 = 636 times
.
,
Interest 47 000
(e) Fixed Charge Coverage:
,
,
PBIDT 2 99 000
= = 446 times
,
,
,
Interest + Preference dividend 47 000 + 20 000
Self Assessment
Choose the right answer

8. Solvency position of the firm studied and interpreted through
(a) Short-term solvency ratios (b) Long-term solvency ratios
(c) Coverage ratios (d) (a), (b) & (c)

9. Efficiency and effectiveness of the firm is studied through

(a) Liquidity ratios (b) Leverage ratios
(c) Turnover ratios (d) Profi tability ratios
10. Standard norm of the Debt to Capital
(a) 1:2 (b) 1:1
(c) 2:1 (d) 1:5
4.5 Profi tability Ratios
These ratios are measurement of the profitability of the firms in various angles, viz.

1. On sales
2. On investments
3. On capital employed and so on

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