QUESTION 3 (15 Marks: 27 minutes) Handyman Limited is a hardware wholesaler supp
ID: 2437786 • Letter: Q
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:
20x3 20x4 20x5 C000s C000s C000s Turnover 100 000 120 000 135 000 Cost of sales 75 000 90 000 101 250 Profit before interest and tax 6 000 5 500 5 600 Accounts receivable 16 500 25 000 29 600 Account payable 13 000 14 700 17 000 Inventory 18 750 26 000 30 400 Bank/ (overdraft) 5 000 (500) (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.
Explanation / Answer
2013
2014
2015
turnover
100000
120000
135000
cost of goods sold
75000
90000
101250
profit before interest and taxes
6000
5500
5600
Accounts receivables
16500
25000
29600
accounts payable
13000
14700
17000
inventory
18750
26000
30400
bank / overdraft
5000
-500
-2000
2014
2015
current ratio =current assets/current liabilities
51000/15200
3.355263
3.157895
current assets
25000+26000
51000
29600+30400
60000
current liabilitties
14700+500
15200
17000+2000
19000
2014
2015
Quick Ratio
quick assets/current liabilities
1.09
1.56
quick assets
16500
16500
29600
current liabilitties
14700+500
15200
17000+2000
19000
2014
2015
cash ratio
cash/current liabilities
-0.03289
-0.10526
cash or bank
-500
-2000
current liabilities
15200
19000
Companys short term solvency position is not good as it has invested more funds into accounts receivables and inventory due to which company Is facing a shortage of cash in hand. So there should be proper management of receivables and inventory to reduce the level of current ratio and should focus on short term liquidity like cash and equivalents
2013
2014
2015
turnover
100000
120000
135000
cost of goods sold
75000
90000
101250
profit before interest and taxes
6000
5500
5600
Accounts receivables
16500
25000
29600
accounts payable
13000
14700
17000
inventory
18750
26000
30400
bank / overdraft
5000
-500
-2000
2014
2015
current ratio =current assets/current liabilities
51000/15200
3.355263
3.157895
current assets
25000+26000
51000
29600+30400
60000
current liabilitties
14700+500
15200
17000+2000
19000
2014
2015
Quick Ratio
quick assets/current liabilities
1.09
1.56
quick assets
16500
16500
29600
current liabilitties
14700+500
15200
17000+2000
19000
2014
2015
cash ratio
cash/current liabilities
-0.03289
-0.10526
cash or bank
-500
-2000
current liabilities
15200
19000
Companys short term solvency position is not good as it has invested more funds into accounts receivables and inventory due to which company Is facing a shortage of cash in hand. So there should be proper management of receivables and inventory to reduce the level of current ratio and should focus on short term liquidity like cash and equivalents
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.