QUESTION 3 (15 Marks: 27 minutes) Handyman Limited is a hardware wholesaler supp

Question

QUESTION 3 (15 Marks: 27 minutes) Handyman Limited is a hardware wholesaler supplying goods to do-it yourself retailers around the country. The company commenced operations at the beginning of the 20x3 year. The company has been operating successfully for a number of years. Although turnover increased consistently, the Company has recently been experiencing cash flow problems. The managing director has approached you for advice on how to improve this situation. The following amounts were extracted from the records of the company: Turnover Cost of sales Profit before interest and tax Accounts receivable Account payable Inventor Bank/ (overdraft) 20x3 CO00s 100 000 75 000 6 000 16 500 13 000 18 750 5 000 20x4 C000s 120 000 90 000 5 500 25 000 14 700 26 000 (500) 20x5 C000s 135 000 101 250 5 600 29 600 17 000 30 400 (2 000) Required 1. Identify and calculate the ratios that are needed to analyse the company's working capital for the periods 20x4 and 20x5. (10 marks) 2. Comment on the company's working capital management in the light of these ratios (5 marks)

Explanation / Answer

Solution:

From the given data we need to find the values for the given requirements,

Answer for 1:

Current ratio = current assets / current liabilities = 51000 / 15200

current assets = 25000 + 26000 = 51000

currect liabilities = 14700 + 500 = 15200

3.55

60000 / 19000

29600 + 30400 = 60000

17000 + 2000 = 19000

3.16

  Quick ratio:

Quick assets / quick liabilities =16500 / 15200

Quick assets = 16500

current liabilities = 15200

  

29600 / 19000

Quick asset= 29600

current liabilities = 19000

Cash ratio :

Cash / current liabilities = - 500 / 15200

cash = - 500

current liabilities = 15200

- 0.03

-2000 / 19000

cash = -2000

current liabilities = 19000

Answer for 1:

Company's here and now dissolvability position isn't great as it has put more subsidizes into accounts receivables and stock because of which organization is confronting a lack of trade out hand.

In this way, there ought to be appropriate administration of receivables and stock to decrease the level of current proportion and should center around here and now liquidity like money and equipements.

Ratios 20X4 Ratios 20X5

Current ratio = current assets / current liabilities = 51000 / 15200

current assets = 25000 + 26000 = 51000

currect liabilities = 14700 + 500 = 15200

3.55

60000 / 19000

29600 + 30400 = 60000

17000 + 2000 = 19000

3.16

  Quick ratio:

Quick assets / quick liabilities =16500 / 15200

Quick assets = 16500

current liabilities = 15200

1.09

  

29600 / 19000

Quick asset= 29600

current liabilities = 19000

1.56

Cash ratio :

Cash / current liabilities = - 500 / 15200

cash = - 500

current liabilities = 15200

- 0.03

-2000 / 19000

cash = -2000

current liabilities = 19000

- 0.10

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