Rearrange BS and Ratio Details Given

TL;DR

This video explains how to prepare a vertical balance sheet and calculate ratios in ratio analysis, using a given question as an example.

Transcript

click the bell icon to get latest videos from equator hello friends will do now one question where we are required to prepare vertical balance and calculate few ratios in ratio analysis chapter let us go through the question following figures have been extracted from the books of Voodoo limited land and building we are required to mark your items f... Read More

Key Insights

• 📼 Preparation of a vertical balance sheet involves categorizing items into fixed assets, current assets, equity capital, current liabilities, and borrowed funds.
• 🫵 Share capital and reserves and surplus constitute the shareholders' fund, providing a view of the company's ownership and retained earnings.
• ⚖️ Debentures represent borrowed funds, which are classified as a liability in the balance sheet.
• 🥳 The debt-equity ratio reveals the company's reliance on borrowed funds versus the funds contributed by shareholders.
• 🥳 The proprietary ratio indicates the proportion of the company's total assets that are financed by the owners' funds.
• 🥳 The capital gearing ratio considers the mix of fixed-interest securities and equity in a company and helps assess its financial risk.
• ⚖️ The vertical balance sheet allows for a more detailed analysis of a company's financial position compared to a traditional horizontal balance sheet.

Questions & Answers

Q: What is the purpose of preparing a vertical balance sheet?

A vertical balance sheet shows the proportion of different items in a company's assets and liabilities, giving a clearer picture of its financial position.

Q: How is equity capital different from preference capital?

Equity capital represents the ordinary shares held by shareholders, while preference capital refers to shares with certain preferential rights, such as fixed dividends.

Q: How is the debt-equity ratio calculated?

The debt-equity ratio is determined by dividing the borrowed funds (debentures) by the shareholders' fund (equity capital and reserves and surplus), providing a measure of financial leverage.

Q: Why is the capital gearing ratio important?

The capital gearing ratio measures the proportion of fixed-interest securities (preferential capital and debentures) in a company's capital structure, indicating its financial risk and stability.

Summary & Key Takeaways

• The video discusses the process of preparing a vertical balance sheet using specific items from the books of Voodoo Limited.

• It explains how to categorize various items into fixed assets, current assets, equity capital, current liabilities, and borrowed funds.

• The video also demonstrates the calculation of three ratios: debt-equity ratio, proprietary ratio, and capital gearing ratio.