Question

Assume that the Fixed Assets Turnover Ratio is 2 Times. State giving reason, which of the following transactions would (i) Increase; (ii) Decrease; or (iii) Not change the ratio:

1. Purchased fixed assets for ₹ 5,00,000.
2. Goods purchased for ₹ 2,00,000 on credit.
3. Sold goods costing ₹ 1,50,000 at a profit of 20%.
4. Machinery sold for ₹ 5,00,000 at a loss of 50,000.
5. Issued equity shares of ₹ 10,00,000.

Answer 1

1. Decrease
   Reason: This purchase increases Net Fixed Assets (the denominator) while Revenue from Operations remains unchanged. An increase in the denominator decreases the overall ratio.
2. Not change
   Reason: This transaction affects stock and current liabilities. Neither Revenue from Operations nor Net Fixed Assets undergoes any change.
3. Increase
   Reason: This transaction increases Revenue from Operations (the numerator) by ₹ 1,80,000 (\(1,50,000 + 20\%\)), while Net Fixed Assets remains completely unaffected.
4. Increase
   Reason: Selling machinery decreases Net Fixed Assets (the denominator) by its book value of ₹ 5,50,000. Revenue from operations is unaffected because the sale of scrap/fixed assets is not part of core operations. A decreased denominator increases the ratio.
5. Not change
   Reason: This transaction increases cash and share capital. Neither Revenue from Operations nor Net Fixed Assets is altered.