Question

Balance Sheet had the following amounts as at 31st March, 2019:

	₹			₹
10% Preference Share Capital	5,00,000		Current Assets	12,00,000
Equity Share Capital	15,00,000		Current Liabilities	8,00,000
Securities Premium Reserve	1,00,000		Investments (in other companies)	2,00,000
Reserves and Surplus	4,00,000		Fixed Assets-Cost	60,00,000
Long-term Loan from IDBI @ 9%	30,00,000		Depreciation Written off	14,00,000

Calculate ratios indicating the Long-term and the Short-term financial position of the company.

Answer 1

(i) Debt-Equity Ratio is an indicator of Long-term financial health. It shows the proportion of Long-term loan in comparison of shareholders’ Funds.

`"Debt - Equity Ratio" = "Long-term Debts"/"Equity"`

Debt = Loan from IDBI @ 9% = 30,00,000

Equity = 10% Preference Share Capital + Equity Share Capital + Reserves & Surplus

= 5,00,000 + 15,00,000 + 4,00,000 = 24,00,000

Debt-Equity Ratio = `3000000/2400000 = 1.25 : 1`

(ii) Current Ratio is an indicator of short-term financial portion. It shows the proportion of Current Assets in comparison of Current Liabilities.

`"Current Ratio" = "Current Assets"/ "Current liability"`

Current Assets = 12,00,000

Current Liabilities = 8,00,000

Current Ratio = `1200000/800000 = 1.5 : 1`

Note: In the above question, Securities Premium Reserve is not considered while computing Equity because it is already included in the amount of Reserves and Surplus.