Page 127 - DMGT403_ACCOUNTING_FOR_MANAGERS

Accounting for Managers

Notes

Notes 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 networth of company ABC is 30 crores and the total assets are worth 10
crores. What is the proprietary ratio of the firm?

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 financial position.

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 firm makes use of the excessive funds for the built of current assets.

Notes 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 firm?
Solution:

Shareholders' Funds + Outsiders' Funds 30 +70 100
Fixed Assets Ratio = = 1 : 1
Net Fixed Assets 100 100

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