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Topic : Analysis of Financial Statments

Discussion Question:

Working capital management is a crucial task for the companies to maintain short term liquidity of their business. It includes management of all constituents of working capital and ignorance of any element can cause serious liquidity issues. Changes in one of these elements affect the overall working capital of the company. Cargo Intel has to pay Rs. 250,000 to its creditors without sacrificing the liquidity. Company also aims to make payment to creditors without increasing the current liabilities. Among various measures of liquidity ratio; management has decided to use “Quick Ratio” as a measure of liquidity. Company has following two options to make payment to creditors:

Option 1. Using cash of Rs. 150,000 and selling marketable securities of Rs. 100,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Option 2. Taking short term loan of Rs. 220,000 and selling marketable securities of Rs. 30,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Following information has been extracted from financial statements of the company for the current year:

Particulars

Rs.

Cash

600,000

Fixed assets

4,000,000

Short term debt

300,000

Marketable securities

170,000

Account receivables

630,000

Creditors

710,000

Inventory

400,000

Accruals

75,000

Long term loan

500,000

Machine and equipment

8,000,000

You are required to calculate:
  1. Quick ratio before using any option
  2. Quick ratio for option 1
  3. Quick ratio for option 2

Which option you will suggest considering the stated objectives of the company. Support your selection with reasoning.

Note:

Calculations are mandatory for all parts, avoid irrelevant details otherwise marks will be deducted.

Important Instructions:

  • Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.
  • Your discussion must be based on logical facts.
  • 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.
  • Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
  • Obnoxious or ignoble answer should be strictly avoided.
  • 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.

For Detailed Instructions, please read the GDB # 01 announcement.

Best of Luck!!

Views: 2890

Replies to This Discussion

Attachments:

Why is no one deducting inventory from the formula? the formula is current assets-inventory/current liabilities 

requirement 1

Quick Ratio=1400000/1085000=1.29

this is right

working capital remains same in both options Rs. 715000/- secondly the management has decided to use Quick Ratio as a measure of liquidity so option 1 is feasible

Why is no one deducting inventory from the formula? the formula is current assets-inventory/current liabilities 



yes you can do it like that

Guys please share the finalise solution 

This solution is totally wrong

final solution check it.

if there is any mitake please tell me 

QUICK%20RATIO%20%20FORMULA.docx

Attachments:

hr koi apna e formula use kr rha a its so confusing 

Current assets k formula me to inventory b add krni hai pr kesi ne ni kea bd me agr wo subtract b kren to 1.29 ans arha a, kindly clear my confusion if anybody can...

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