1) What will the effect on present operating ratio of 80%, if there is purchase of goods of Rs. 25000 ?
2) What will the effect on present operating ratio of 80%, if there is payment of office and selling expenses of Rs. 5000?
3) What will be the effect on present debt-equity ratio of 2, if provision for interest accrued and due but not paid on debentures is made?
Hi Naman
Operating Cost = Cost of Goods Sold + Operating Expenses
As we know, COGS = Opening Stock + Purchases + Direct Expenses - Closing Stock
and Operating Expenses = Office & Administrative Expenses + Selling & Distribution Expenses + Discount Allowed + Bad Debts + Interest on Short-term Loan
1. If goods are purchased, the value of COGS (purchases being a part of COGS) will increase and consequently operating ratio will increase.
2. If there is a payment of office and selling expenses, operating expenses will increase and consequently operating ratio will also increase.
Debt = Long-term Debt
Equity = Shareholders' Funds
3. If a provision is maintained for interest accrued and due but not paid on debentures, it will be treated as current liability and thus will not affect the debt-equity ratio.
Since interest due but not paid is a current liability for the business, so, any provision made thereupon will also be regarded as a current liability. Thus, long-term debts will remain intact and debt equity ratio will remain unaffected.
Operating Cost = Cost of Goods Sold + Operating Expenses
As we know, COGS = Opening Stock + Purchases + Direct Expenses - Closing Stock
and Operating Expenses = Office & Administrative Expenses + Selling & Distribution Expenses + Discount Allowed + Bad Debts + Interest on Short-term Loan
1. If goods are purchased, the value of COGS (purchases being a part of COGS) will increase and consequently operating ratio will increase.
2. If there is a payment of office and selling expenses, operating expenses will increase and consequently operating ratio will also increase.
Debt = Long-term Debt
Equity = Shareholders' Funds
3. If a provision is maintained for interest accrued and due but not paid on debentures, it will be treated as current liability and thus will not affect the debt-equity ratio.
Since interest due but not paid is a current liability for the business, so, any provision made thereupon will also be regarded as a current liability. Thus, long-term debts will remain intact and debt equity ratio will remain unaffected.