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Question
State with reason whether the following transactions will increase, decrease or not change the 'Return on Investment' Ratio:
(i) Purchase of machinery worth ₹10,00,000 by issue of equity shares.
(ii) Charging depreciation of ₹25,000 on machinery.
(iii) Redemption of debentures by cheque ₹2,00,000.
(iv) Conversion of 9% Debentures of ₹1,00,000 into equity shares.
Solution
| Transaction | Impact |
| Purchase of machinery worth Rs 10,00,000 by issue of equity shares. | Issue of shares will lead to an increase in the capital employed by Rs 10,00,000.But profit remains intact and so there will be a decline in the return on investment ratio. |
| Charging depreciation of Rs 25,000 on machinery. | Simultaneous decrease in profits and capital employed by Rs 25,000 will lead to a decline in return on investment ratio. |
| Redemption of debentures by cheque Rs 2,00,000. | Redemption of debentures will lead to a decrease in the capital employed by Rs 2,00,000. Butprofit remains intact and so there will be an increase in the return on investment ratio. |
| Conversion of 9% Debentures of Rs 1,00,000 into equity shares. | Decrease in debentures and increase in share capital causing a simultaneous increase and decrease in capital employed will leave the return on investment ratio unchanged. |
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| Revenue from Operations (Net Sales) | 8,00,000 | 7,00,000 |
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| 1st April, 2018 ₹ |
31st March, 2019 ₹ |
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| Gross Profit Ratio | 12% | 15% | 18% |
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