the balance sheet of abc auto limited as of 31 - 12 - 2020 was as follows:\n\n| particular | rs. |…

the balance sheet of abc auto limited as of 31 - 12 - 2020 was as follows:\n\n| particular | rs. | particular | rs. |\n|--|--|--|--|\n| equity share capital | 40,000 | plant and machinery | 24,000 |\n| capital reserve | 8,000 | land and buildings | 40,000 |\n| 8% loan on mortgage | 32,000 | furniture & fixtures | 16,000 |\n| creditors | 16,000 | stock | 12,000 |\n| bank overdraft | 4,000 | debtors | 12,000 |\n| taxation: | | investments (short - term) | 4,000 |\n| current | 4,000 | cash in hand | 12,000 |\n| future | 4,000 | | |\n| profit and loss a/c | 12,000 | | |\n| | 120,000 | | 120,000 |\n\nfrom the above, you are asked to compute the following and to explain why they are important to be measured:\n\n1. the current ratio\n2. quick ratio\n3. debt - equity ratio\n4. proprietary (equity) ratio

the balance sheet of abc auto limited as of 31 - 12 - 2020 was as follows:\n\n| particular | rs. | particular | rs. |\n|--|--|--|--|\n| equity share capital | 40,000 | plant and machinery | 24,000 |\n| capital reserve | 8,000 | land and buildings | 40,000 |\n| 8% loan on mortgage | 32,000 | furniture & fixtures | 16,000 |\n| creditors | 16,000 | stock | 12,000 |\n| bank overdraft | 4,000 | debtors | 12,000 |\n| taxation: | | investments (short - term) | 4,000 |\n| current | 4,000 | cash in hand | 12,000 |\n| future | 4,000 | | |\n| profit and loss a/c | 12,000 | | |\n| | 120,000 | | 120,000 |\n\nfrom the above, you are asked to compute the following and to explain why they are important to be measured:\n\n1. the current ratio\n2. quick ratio\n3. debt - equity ratio\n4. proprietary (equity) ratio

Answer

Explanation:

Step1: Identify current assets

Current assets = Stock + Debtors+ Investments (Short - term)+ Cash in hand = 12000 + 12000+4000 + 12000=40000 Rs.

Step2: Identify current liabilities

Current liabilities = Creditors+ Bank overdraft+ Current Taxation = 16000 + 4000+4000 = 24000 Rs.

Step3: Calculate Current Ratio

Current Ratio = $\frac{\text{Current Assets}}{\text{Current Liabilities}}$ = $\frac{40000}{24000}=\frac{5}{3}\approx1.67$

Step4: Calculate Quick Assets

Quick Assets = Debtors+ Investments (Short - term)+ Cash in hand = 12000 + 4000+12000 = 28000 Rs.

Step5: Calculate Quick Ratio

Quick Ratio = $\frac{\text{Quick Assets}}{\text{Current Liabilities}}$ = $\frac{28000}{24000}=\frac{7}{6}\approx1.17$

Step6: Identify total debt

Total debt = 8% Loan on Mortgage+ Creditors+ Bank overdraft+ Current Taxation+ Future Taxation = 32000+16000 + 4000+4000+4000 = 60000 Rs.

Step7: Identify total equity

Total equity = Equity Share Capital+ Capital Reserve+ Profit and Loss A/c = 40000+8000 + 12000 = 60000 Rs.

Step8: Calculate Debt - Equity Ratio

Debt - Equity Ratio = $\frac{\text{Total Debt}}{\text{Total Equity}}$ = $\frac{60000}{60000}=1$

Step9: Calculate Proprietary (Equity) Ratio

Proprietary (Equity) Ratio = $\frac{\text{Total Equity}}{\text{Total Assets}}$ Total Assets = Plant and Machinery+ Land and Buildings+ Furniture & Fixtures+ Stock+ Debtors+ Investments (Short - term)+ Cash in hand = 24000+40000+16000+12000+12000+4000+12000 = 120000 Rs. Proprietary (Equity) Ratio = $\frac{60000}{120000}=0.5$

Importance of measurement:

  • Current Ratio: It measures a company's ability to pay short - term obligations. A higher ratio indicates better short - term solvency.
  • Quick Ratio: It is a more conservative measure of short - term liquidity as it excludes inventory. It shows a company's ability to meet current liabilities without relying on inventory sales.
  • Debt - Equity Ratio: It shows the proportion of debt and equity in a company's capital structure. It helps in assessing financial risk. A lower ratio may indicate lower financial risk.
  • Proprietary (Equity) Ratio: It shows the proportion of total assets financed by shareholders' equity. It reflects the long - term financial stability of the company.

Answer:

  1. Current Ratio: $\frac{5}{3}\approx1.67$
  2. Quick Ratio: $\frac{7}{6}\approx1.17$
  3. Debt - Equity Ratio: 1
  4. Proprietary (Equity) Ratio: 0.5