T.S. Grewal Class 12 Vol 3 Chapter 4 Q.171 - Accounting Ratios

Question 171

State with reason whether the following transactions will increase, decrease, or not change the Return on Investment Ratio:
(i) Purchase of machinery worth ₹10,00,000 by issue of equity shares.
(ii) Charging depreciation of ₹25,000 on machinery.
(iii) Redemption of debentures by cheque ₹2,00,000.
(iv) Conversion of 9% Debentures of ₹1,00,000 into equity shares.

Solution

Transaction	Effect	Reason
(i) Purchase of machinery worth ₹10,00,000 by issue of equity shares	Decrease	Issue of shares increases Capital Employed by ₹10,00,000, while Profit remains unchanged, so the ratio declines.
(ii) Charging depreciation of ₹25,000 on machinery	Decrease	Profit and Capital Employed both decrease by the same amount (₹25,000); since Profit is smaller than Capital Employed, an equal absolute decrease reduces the ratio further.
(iii) Redemption of debentures by cheque ₹2,00,000	Increase	Capital Employed decreases by ₹2,00,000, while Profit remains unchanged, so the ratio increases.
(iv) Conversion of 9% Debentures of ₹1,00,000 into equity shares	No Change	Debt decreases and Equity increases by the same amount, so Capital Employed (Debt + Equity) remains unchanged.