Page 201 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes of the fi rm. Greater the ratio means that greater contribution made by the owners’ in fi nancing
the assets.
Owners' Funds or Equity or Shareholders' Funds
Proprietary Ratio =
Total Assets
!
Caution Standard Norm of the ratio:
Higher the ratio, better is the position

Higher ratio is better position for the firm as well as safety to the creditors.
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 = = = 3:1
Total assets 10
The ratio shows that the firm is in quite a good fi nancial position.

11.5.3 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.
Shareholders' Funds + Outsiders' Funds
Fixed Assets Ratio =
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 = = = = 1: 1
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.

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