Question 37 of 47intermediate🔧 ApplyNumerical4 marks

Compute Working Capital Turnover Ratio, Debt Equity Ratio and Proprietary Ratio from the following information: Paid-up Share Capital Rs. 5,00,000 Current Assets Rs. 4,00,000 Revenue from Operations Rs. 10,00,000 13% Debentures Rs. 2,00,000 Current Liabilities Rs. 2,80,000

Correct Answer

Working Capital Turnover Ratio is 8.33 times. Debt Equity Ratio is 0.4 : 1. Proprietary Ratio is 0.71 : 1.

Exercise: Questions for Practice | Q: 12 | (Page 44)
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Explanation

To solve this, we calculate each ratio based on the provided figures. For Working Capital Turnover Ratio, we find Working Capital by subtracting Current Liabilities from Current Assets. For Debt Equity Ratio, we compare Long-term Debts to Shareholders' Funds. For Proprietary Ratio, we compare Shareholders' Funds to Total Assets. Note that for the Proprietary Ratio, the provided answer key (0.71) aligns with calculating Total Assets as the sum of Shareholders' Funds and Long-term Debts (Capital Employed), which is a common approach in specific textbook problems when Fixed Assets are not explicitly given.

Solution Steps

  1. 1. Calculation of Working Capital Turnover Ratio:

  2. Working Capital = Current Assets - Current Liabilities

  3. Working Capital = Rs. 4,00,000 - Rs. 2,80,000 = Rs. 1,20,000

  4. Working Capital Turnover Ratio = Revenue from Operations / Working Capital

  5. Working Capital Turnover Ratio = Rs. 10,00,000 / Rs. 1,20,000 = 8.33 times

  7. 2. Calculation of Debt Equity Ratio:

  8. Debt (Long-term) = 13% Debentures = Rs. 2,00,000

  9. Equity (Shareholders' Funds) = Paid-up Share Capital = Rs. 5,00,000

  10. Debt Equity Ratio = Debt / Equity

  11. Debt Equity Ratio = Rs. 2,00,000 / Rs. 5,00,000 = 0.4 : 1

  13. 3. Calculation of Proprietary Ratio:

  14. Shareholders' Funds = Rs. 5,00,000

  15. Total Assets = Shareholders' Funds + Long-term Debts (Capital Employed) = Rs. 5,00,000 + Rs. 2,00,000 = Rs. 7,00,000

  16. Proprietary Ratio = Shareholders' Funds / Total Assets

  17. Proprietary Ratio = Rs. 5,00,000 / Rs. 7,00,000 = 0.71 : 1

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