There are two statements marked as Assertion (A) and Reason (R). Mark your answer as per the options given below.
Assertion (A): Proprietary Ratio shows the proprietor funds invested in total assets.
Reason (R): The formula for calculating this ratio is Shareholder's funds/Total Assets. Thus, it shows the investment of Proprietors' Funds in total assets.
Answer & explanation
Correct answer: option 1
Proprietary ratio expresses relationship of proprietor’s (shareholders) funds to net assets and is calculated as follows : Proprietary Ratio = Shareholders’, Funds/Capital employed (or net assets).
Higher proportion of shareholders funds in financing the assets is a positive feature as it provides security to creditors. This ratio can also be computed in relation to total assets instead of net assets (capital employed). It may be noted that the total of debt to capital employed ratio and proprietory ratio is equal to 1.