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Cost and Management Accounting




                    Notes


                                      Task   From the following particulars, prepare Trading, Profi t & Loss account and a
                                     balance sheet.
                                     Current ratio -3
                                     Liquid ratio -1.8
                                     Bank overdraft - ` 20,000
                                     Working capital - ` 2,40,000

                                     Debtors velocity -1 month; Gross profit  ratio -20%
                                     Proprietary ratio (Fixed assets/shareholders’ fund) -.9
                                     Reserves and surpluses -.25 of share capital
                                     Opening stock - ` 1,20,000; 8% Debentures -` 3,60,000
                                     Long term investments -` 2,00,000
                                     Stock turnover ratio -10 times
                                     Creditors velocity -1/2 month

                                     Net profit to share capital -20%
                                   Self Assessment

                                   State whether the following statements are true or false:

                                   8.   The stock turnover ratio expresses the speed of converting the stock into cash.
                                   9.   Higher the duration shows greater the effectiveness in collecting the dues.
                                   10.   Greater the duration is better the liquidity management of the firm in availing the credit

                                       period of the creditors and vice versa.
                                   11.5 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:

                                   11.5.1 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.




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