Match the items in Column – I with the items in Column – II and indicate the correct code :
Column – I Column – II a. Debt-Equity Ratio i. Net Profit before interest and tax
$\div Interest on long term loans$b. Proprietary Ratio ii. Equity share capital + Reserves
$\div Preference share capital + Interest bearing finance$c. Interest coverage ratio iii. Long term debts
$\div Shareholder's Funds $d. Capital gearing ratio iv. Shareholder's Funds
$\div Total Assets $
Codes:
a-iii, b-iv, c-i, d-ii
Matching Financial Ratios: Column I and II
This section details the correct pairings between financial ratios in Column I and their definitions from Column II, crucial for financial analysis and understanding.
Debt-Equity Ratio Explanation
a. Debt-Equity Ratio correctly matches with iii. Long term debts $\div$ Shareholder's Funds.
- Reasoning: This ratio assesses financial leverage by comparing long-term debt obligations against shareholder equity.
$ \text{Debt-Equity Ratio} = \frac{\text{Long term debts}}{\text{Shareholder's Funds}} $
Proprietary Ratio Explanation
b. Proprietary Ratio correctly matches with iv. Shareholder's Funds $\div$ Total Assets.
- Reasoning: This ratio indicates the proportion of a company's assets financed by owners' equity, reflecting solvency.
$ \text{Proprietary Ratio} = \frac{\text{Shareholder's Funds}}{\text{Total Assets}} $
Interest Coverage Ratio Explanation
c. Interest coverage ratio correctly matches with i. Net Profit before interest and tax $\div$ Interest on long term loans.
- Reasoning: This ratio assesses the company's ability to cover its interest expenses using operating earnings (EBIT).
$ \text{Interest Coverage Ratio} = \frac{\text{Net Profit before interest and tax}}{\text{Interest on long term loans}} $
Capital Gearing Ratio Explanation
d. Capital gearing ratio correctly matches with ii. Equity share capital + Reserves $\div$ Preference share capital + Interest bearing finance.
- Reasoning: This ratio measures the proportion of fixed-interest bearing capital (like preference shares and debt) relative to equity.
$ \text{Capital Gearing Ratio} = \frac{\text{Equity share capital + Reserves}}{\text{Preference share capital + Interest bearing finance}} $
Important Questions from Ratio analysis
A company sold 20% of the goods on cash basis and balance on credit basis. Debtors are allowed \(1\frac{1}{2}\) months’ credit and their balances as on 31st March, 2023 is Rs. 1,25,000. Assume that the sale is uniform throughout the year. Credit sales would be
The amount of closing stock would be, when
Sales - Rs. 6,00,000
Opening Stock - Rs. 50,000
Purchases - Rs. 5,00,000
Productive Wages - Rs. 10,000
Carriage Inwards - Rs. 7,000
Rate of Gross Profit on cost - 20%
Match List–I with List–II :
List I
(Useful ratio)
List II
(Symptom)
(a)
Finished goods turnover ratio (i)
Liquidity crisis (b)
Interest coverage ratio (ii)
Inability to pay dues to financial institutions (c)
Debt-service coverage ratio (iii)
Inability to pay interest (d)
Current ratio and quick ratio (iv)
Falling demand for the product in the market
Select the correct answer using the codes given below.Consider the below mentioned statements and state the correct code of the statements being true or false.
Statement (I): A debt-equity ratio of 2 : 1 indicates that for every 1 unit of equity, the company has raised 2 units of debt.
Statement (II): The cost of floating an equity issue is lesser than the cost of floating a debt
Code:
Debt Service Coverage Ratio indicates which one of the following?
