Question

Provide examples on how to compute the following:

Ratio of Capital Outlay/Total Expenditures

Ratio of Debt Service/Total Expenditures

Answer 1

The ratio of Capital Outlay/Total Expenditures:

Meaning of Capital Outlay:

It is the funds invested by the organisation in its New Fixed Assets and the cost incurred for replacement of the existing asset.

Meaning of Total Expenditures:

This is the Revenue/Net Operating Expenditure (incurred to run the business or generating the revenue).

The ratio of Capital Outlay/ Total Expenditure indicates the rough indicator of the Capital Assets is being adequately replaced.Over a number of years, the relationship between capital outlay and operating expenditures is likely to remain about the same. If this ratio declines in the short run (one to three years) it may mean that the Organisation needs are temporarily satisfied since most capital assets last more than one year. A decline persisting over three or more years can indicate that capital outlay needs are being deferred, which can result in the use of inefficient or obsolete equipment. organisation tend to eliminate expenditures on capital outlay when revenues are declining in relation to the organisation overall operating expenditures.

The Ratio of Debt Service/Total Expenditures

This ratio used to assess the financial health of local governments.Debt service expenditures include principal retirement, interest and other fiscal charges made in the current fiscal year. The ratio of debt service expenditures as a percentage of total governmental fund expenditures can be used to assess service flexibility with the amount of expenses committed to annual debt service. As the ratio increases, service flexibility decreases because more operating resources are being committed to a required financial obligation. In other words, the more a government spends on financing its debt, the less it will have available to fund ongoing services.