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✦ FREE LEARNING — CLASS 11 & 12 — CBSE · PSEB — ACCOUNTS · ECONOMICS · BST ✦
The Debt to Equity Ratio of a company is 0.5:1. Which of the following suggestions would increase, decrease, or not change it:
(i) Issue of Equity Shares; (ii) Cash received from debtors; (iii) Redemption of debentures; (iv) Purchase of goods on credit?
Debt Equity Ratio = 0.5:1. Assume Long-term Loan (Debt) = ₹5,00,000 and Shareholders’ Funds (Equity) = ₹10,00,000 (5,00,000 ÷ 10,00,000 = 0.5:1).
(i) Issue of Equity Shares, say ₹5,00,000 — Decrease
Reason: Shareholders’ Funds increase; Long-term Loan is unaffected.
Shareholders’ Funds after issue = 10,00,000 + 5,00,000 = ₹15,00,000
New Ratio = 5,00,000 ÷ 15,00,000 = 0.33:1
(ii) Cash received from Debtors — No Change
Reason: This only converts one current asset (Debtors) into another (Cash) in equal amount; Long-term Loan and Shareholders’ Funds are unaffected.
(iii) Redemption of Debentures, say ₹2,00,000 — Decrease
Reason: Long-term Loans decrease due to the reduction in Debentures; Shareholders’ Funds are unaffected.
Long-term Loan = 5,00,000 − 2,00,000 = ₹3,00,000
New Ratio = 3,00,000 ÷ 10,00,000 = 0.3:1
(iv) Purchase of goods on Credit — No Change
Reason: This affects only Current Liabilities (Trade Payables), not Long-term Loans or Shareholders’ Funds.
Accounting & Commerce Educator
Sarbjit Singh holds a B.Com and M.Com degree and has over 12 years of teaching experience in double entry bookkeeping, financial accounting, and business studies.
This guide covers "T.S. Grewal Class 12 Vol 3 Chapter 4 Q.47 - Accounting Ratios", focusing on key definitions, step-by-step concepts, applications, and revision guidelines relevant to Chapter 4 - Accounting Ratios.
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