Advertisements
Advertisements
Question
Short Answer Question
The liquidity of a business firm is measured by its ability to satisfy its long-term obligations as they become due. What are the ratios used for this purpose?
Solution
The liquidity of a business firm is measured by its ability to pay its long term obligations. The long term obligations include payments of principal amount on the due date and payments of interests on the regular basis. Long term solvency of any business can be calculated on the basis of the following ratios.
a. Debt-Equity Ratio- It depicts the relationship between the borrowed fund and owner’s funds. The lower the debt-equity ratio higher will be the degree of security to the lenders. A low debt-equity ratio implies that the company can easily meet its long term obligations.
Debt - Equity Ratio = `"Long term Debt"/"Equity / share holders Fund"`
b. Total Assets to Debt Ratio- It shows the relationship between the total assets and the long term loans. A high Total Assets to Debt Ratio implies that more assets are financed by the owner’s fund and the company can easily meet its long-term obligations. Thus, a higher ratio implies more security to the lenders.
Total Assets to Debt Ratio = `"Total Assets"/"Long term Debt"`
c. Interest Coverage Ratio- This ratio depicts the relationship between amount of profit utilised for paying interest and amount of interest payable. A high Interest Coverage Ratio implies that the company can easily meet all its interest obligations out of its profit.
Interest Coverage Ratio =
`"Net Profit before Interest and Tax"/"Interest on Long-term Loans"`
APPEARS IN
RELATED QUESTIONS
Current liabilities of a company are Rs 75,000. If current ratio is 4:1 and liquid ratio is 1:1, calculate value of current assets, liquid assets and inventory.
Compute Gross Profit Ratio, Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information:
|
|
Rs |
|
Paid-up Share Capital |
5,00,000 |
|
Current Assets |
4,00,000 |
|
Revenue from Operations |
10,00,000 |
|
13% Debentures |
2,00,000 |
|
Current Liabilities |
2,80,000 |
|
Cost of Revenue from Operations |
6,00,000 |
From the following information, calculate the following ratios:
i) Quick Ratio
ii) Inventory Turnover Ratio
iii) Return on Investment
| Rs. | |
| Inventory in the beginning | 50,000 |
| Inventory at the end | 60,000 |
| Revenue from operations | 4,00,000 |
| Gross Profit | 1,94,000 |
| Cash and Cash Equivalents | 40,000 |
| Trade Receivables | 1,00,000 |
| Trade Payables | 1,90,000 |
| Other Current Liabilities | 70,000 |
| Share Capital | 2,00,000 |
| Reserves and Surplus | 1,40,000 |
(Balance in the Statement of Profit & Loss A/c)
Current Liabilities of a company are ₹ 6,00,000. Its Current Ratio is 3 : 1 and Liquid Ratio is 1 : 1. Calculate value of Inventory.
Capital Employed ₹8,00,000; Shareholders' Funds ₹2,00,000. Calculate Debt to Equity Ratio.
Calculate Total Assets to Debt Ratio from the following information:
Long-term Debts ₹ 4,00,000; total Assets ₹ 7,70,000.
From the following infromation, calculate Proprietary Ratio:
|
|
₹ |
| Equity Share Capital | 3,00,000 |
| Preference Share Capital | 1,50,000 |
| Reserves and Surplus | 75,000 |
| Debentures | 1,80,000 |
|
Trade Payables |
45,000 |
|
|
7,50,000 |
|
Fixed Assets |
3,75,000 |
| Short-term Inverstments | 2,25,000 |
|
Other Current Assets |
1,50,000 |
|
|
7,50,000 |
From the following information, calculate Inventory Turnover Ratio:
| ₹ | |
| Revenue from Operations | 16,00,000 |
| Average Inventory | 2,20,000 |
| Gross Loss Ratio 5% |
Calculate Inventory Turnover Ratio in each of the following alternative cases:
Case 1: Cash Sales 25% of Credit Sales; Credit Sales ₹3,00,000; Gross Profit 20% on Revenue from Operations, i.e., Net Sales; Closing Inventory ₹1,60,000; Opening Inventory ₹40,000.
Case 2: Cash Sales 20% of Total Sales; Credit Sales ₹4,50,000; Gross Profit 25% on Cost; Opening Inventory ₹37,500; Closing Inventory ₹1,12,500.
From the following particulars, determine Trade Receivables Turnover Ratio:
| ₹ | |
| Revenue from Operations (Net Sales) | 10,00,000 |
| Credit Revenue from Operations (Credit Sales) | 8,00,000 |
| Trade Receivables | 1,00,000 |
Calculate Trade Payables Turnover Ratio for the year 2018-19 in each of the alternative cases:
Case 1 : Closing Trade Payables ₹ 45,000; Net Purchases ₹ 3,60,000; Purchases Return ₹ 60,000; Cash Purchases ₹ 90,000.
Case 2 : Opening Trade Payables ₹ 15,000; Closing Trade Payables ₹ 45,000; Net Purchases ₹ 3,60,000.
Case 3 : Closing Trade Payables ₹ 45,000; Net Purchases ₹ 3,60,000.
Case 4 : Closing Trade Payables (including ₹ 25,000 due to a supplier of machinery) ₹ 55,000; Net Credit Purchases ₹ 3,60,000.
Calculate Return on Investment (ROI) from the following details: Net Profit after Tax ₹ 6,50,000; Rate of Income Tax 50%; 10% Debentures of ₹ 100 each ₹ 10,00,000; Fixed Assets at cost ₹ 22,50,000; Accumulated Depreciation on Fixed Assets up to date ₹ 2,50,000; Current Assets ₹ 12,00,000; Current Liabilities ₹ 4,00,000.
On the basis of the following information calculate:
(ii) Working Capital Turnover Ratio.
| Information: | ₹ | ₹ | |||
| Revenue from Operations: | (a) Cash Sales | 40,00,000 | Paid-up Share Capital | 17,00,000 | |
| (b) Credit Sales | 20,00,000 | 6% Debentures | 3,00,000 | ||
| Cost of Goods Sold | 35,00,000 | 9% Loan from Bank | 7,00,000 | ||
| Other Current Assets | 8,00,000 | Debentures Redemption Reserve | 3,00,000 | ||
| Current Liabilities | 4,00,000 | Closing Inventory | 1,00,000 |
Which Ratio establishes the relationship between current assets and current liabilities?
Liquidity ratios includes which two types of ratios?
Calculate current ratio from the following information:
Stock Rs.50,000, Cash 30,000, Debtors 40,000, Creditors 60,000, Bills Receivable 10,000, Bills Payable 40,000, Advance Tax 4,000, Bank Overdraft 4,000
Which of the following items will be adjusted to Net Profit before Tax?
The primary concern of creditors when assessing the strength of a firm is the firm's ______
Debt to Capital Employed ratio is 0.3:1. State whether the following transaction, will improve, decline or will have no change on the Debt to Capital Employed Ratio. Also give reasons for the same.
Sale of Equipment costing ₹ 10,00,000 for ₹ 9,00,000.
