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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

yes u r right... 

aoa plz share some solution of this gdb plzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz

hints: 

case (1) 

Total C.A = 650,000 + 100,000 = 750,000

Toatal C.L = 500000 + 100,000 = 600,000

Current ratio = 750/600 = 1.25

Case (2)

Total C.A = 450,000

Total C.L  = 300,000

Current ratio = 450/300 = 1.5

will we add 100,000 or 112000 in liability side? becuse it is accrual basis .

she bola ap ne..

GDB share kr dain please

will share the final results tomorrow night Inshah ALLAH 

because already have other subjects load...

thank you very much

Case 1

Current ratio =current assets/current liabilities

                          750,000/600,000

                   = 1.25

 

By acquiring short term loan liability increases although company cash balance increases but intrest payments and loan amount push the liability side up, and current ratio further decreases, so this is not good option.

 

Case 2

             Current ratio =current assets/current liabilities

                                   =  450,000/300,000

                                   = 1.5

In this option when company dispose off its marketable securities for paying loan, assets decrease but liability also decreases with the same amount which improves the current ratio.

Keep in mind members I m not considering intrest etc. This is the idea solution, u should prepare  it in your own words for securing good grades.Gud luck 

Pakeeza..

can u elaborate the formula of current assets and current liabilities ? like how to calculate these ?

Current asstes=cash+inventory+Acccounts receivable+marketable securites

Current liabilties= Accounts payable + Accurals+ short term debt

Full and final solution... MGT201 GDB no 01

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