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ACC501 Business Finance GDB No 01 Spring 2019 Solution & Discussion Last Date: 17-05-2019

ACC501 Business Finance GDB No 01 Spring 2019 Solution & Discussion Last Date: 17-05-2019

Dear Students!

This is to inform you that Graded Discussion Board (GDB) No. 01 will be opened on May 13, 2019 for discussion and last date for posting your discussion will be May 17, 2019

Topic/Area for Discussion:

“Current Ratio”

This Graded Discussion Board will cover Audio/Video lessons # 8 and 9.

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Discussion Question:

Current ratio is an important tool in the financial analysis toolkit. This tool is aimed to determine short term liquidity position of any business entity. It helps to determine an entity’s ability to pay its short term obligations. To compute this ratio, current assets are divided by current liabilities. Ideally, a ratio of 2 is considered appropriate for a manufacturing entity. Current ratio below one indicates that the entity has negative working capital which means the entity’s long term assets have been financed through some portion of short term debt. 

Assume that Net Working Capital is positive for a business entity and its current ratio is 1.2 times. How would the following events affect (increase/decrease/no effect) the current ratio of the company. Also provide the conceptual reason behind each effect.

1.         Inventory is purchased on credit.

2.         Repayment of last installment of a long term loan.

3.         A credit customer pays off on a discount of 3%.

4.         Improvement in current assets through new equity issue.

Your comments should be in the following format:

Event

Effect

Reason

Example:

Inventory is purchased on     cash.

 

  No effect

The cash will be reduced by the same amount of inventory.

Inventory is purchased on    credit.

   ??

??

Important Instructions:

  1. Your discussion must be based on logical facts.
  2. Do not copy or exchange your answer with other students. Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  3. Obnoxious or ignoble answer should be strictly avoided.
  4. Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB is over.

Ans 01. If the inventory is purchased on cash there will be an increase in Current ratio, but in our case, inventory purchased on credit and already we have a ratio more than 01 so it will decrease the current ratio.

 

Ans 02. As we have an initial current ratio more than 01 so repayment of the last installment of the long-term loan will increase the Current Ratio. If the loan has not yet become a current liability, then paying it off will reduce the current ratio.

 

Ans 03. Reduction of accounts receivable and increase in cash has no effect on the Current Ratio. Because it’s already recorded on both side of the journal (credit & debit).

Ans 04: 

When the current assets are financed by equity rather than the creditors, the level of current assets would increase with current liabilities remaining the same. Consequently, this exercise will increase the current ratio. 

long term is not the part of current ratio thn how it effect

ACC501-GDB-1-Solution-Spring-2019

Attachments:
Acc501- gdb 1 - ka question 3 aur 4 ka solution bta dn

ACC501 GDB Solution Spring 2019

Where is solution of point# 1. " Inventory is purchased on credit." ...?

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