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Topic: Analysis of Financial Statements

Discussion Question:

Sehgal Manufacturers is facing an issue of managing its working capital needs, management is worried about financing of daily operations. Although sales of company have an increasing trend but still company is facing shortage of cash. Liquidity analysis of the company’s financial data showed that company has current ratio of 1.3:1 and management wants an improvement in the current ratio. Financial manager of the company has suggested following two alternatives:

  1. Acquiring short term loan of Rs. 100,000 at 12% annual interest rate
  2. Reducing current liabilities by paying off short-term debt of Rs. 200,000 using marketable securities (Ignore gain or loss on sale of marketable securities)

Following information has been extracted from the financial statements for the analysis:

Particulars

Rs.

Particulars

Rs.

Cash

200,000

Account payables

100,000

Fixed assets

1,500,000

Accruals

150,000

Inventory

150,000

Short term debt

250,000

Net Income

725,250

10-year Bonds

150,000

Account receivables

100,000

Marketable securities

200,000

You are required to discuss the impact of each alternative on current ratio (calculations of current ratio in both cases is mandatory as working carries marks) and suggest which option company should select to improve the current ratio without pushing up its liabilities?  Provide reason to support your selection.

NOTE:

You are required to provide complete calculations along with formulas, otherwise marks will be deducted. Also avoid unnecessary details.

 

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Replies to This Discussion

Post your GDB comments (answer) against GDB # 01.

Closing date Monday, May 08, 2017

Current ratio means only current assets and current liabilities so first of all exclude net income and 10 year bonds because of longer maturity time period these are not the part of the current liabilities. Sum up all the current assets and current liabilities and divide in each of the case, remember we have to choose the option without pushing up liabilities, and when we choose the first one by raising short term loan its mean we are increasing our liabilities, so in the simple way sehagal can improve current ratio by adopting the 2nd option, this is the idea solution,gdb is piece of cake guys.hoping rest of the work members can do.Gud luck  

Thanks pakeeza for ur  valuable inputs .... 

Thanx

Hi sister please share the concepts of that particular GDB and start discuss about it.
Regards
Zafar Iqbal

plz share with calculation

Thanks Pakeeza. I have done Ratio part already, can you please confirm, is there any need of comparing both projects with NPV or Discounting criteria?To me, it dont seem possible.

2nd we will add 100,000 in liability side or 1,12,000(@12%Interest)?

No Dear not at all,because we have to conduct analysis of financial statements, nothing is related to NPV etc, because discount rates etc or time period means n is not Provided, as far as issue related to the interest rate of 12% which the company has to pay if it raise loan at short term bases in that case two entries are made Int.payable to Accounts payable, the rational of this entry is always increase in expense and increase in liability, but in the given scenario,company has marketable securities in hand and in the crisis situation the 1st priority of the financial manager is always the sale of marketable securities to improve the financial situation, although we have to consider the interest factor also but not the NPV or discounting etc.Hope u got it..best of luck siso.

Thanks dear :-)

Please Discuss here about this GDB.Thanks

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when we add 100000 in busines by taking loan its mean we pushing up our liabilities on the other hand no change in current ratio because 100000 add in cash and also add in liabilities including with interest which we pay 12 %

2nd option is to pay off short term debt with marketable securities i think  its reasonable

when we subtract marketable securities from the total current assets and payy off liability section the liqudity of the firm is increase

please correct me if i am wrong

ap ny gdb kar li hai

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