Ask Me Help Desk

Ask Me Help Desk (https://www.askmehelpdesk.com/forum.php)
-   Finance & Accounting (https://www.askmehelpdesk.com/forumdisplay.php?f=411)
-   -   Working capital management (https://www.askmehelpdesk.com/showthread.php?t=75938)

  • Mar 26, 2007, 01:31 AM
    mairahaider
    working capital management
    Q-1)-
    ABC Ltd is making a sales of Rs.50,00,000 by extending a credit of 30 days to its customers. It has a variable cost of 70%. The Managers of this firm belief that the sales can be increased by liberalizing the credit terms from 30 days up to 90 days. The sales manager has given following estimates of sales under different credit period.

    Policy Terms Sales
    I 45 days Rs.56,00,000
    II 60 days Rs.60,00,000
    III 75days Rs.65,00,000
    IV 90 days Rs.72,00,000

    Given that the cost of capital of the firm is 20% (Year =360 days). You are to suggest as to which policy is best for the firm


    Q-2)-
    The Financial data for Alpha group for 2002 through 2004 are as given below. This group has declared bankruptcy in June 2006 soon after publishing the Financial Statements for its year ended December 31, 2005.



    Balance Sheet for Alpha group
    (Rs in thousands)
    December 31

    Assets 2002 2003 2004

    Cash and marketable securities Rs 12 Rs 10 Rs 82
    Accounts receivable* 297 199 315
    Inventories 431 472 735
    Prepaid expense and other 45 27 66
    --------- -------- ---------
    Current assets Rs 785 Rs 708 Rs 1,198
    Net Property 130 224 326
    Other assets 736 851 1,239
    ---------- ---------- ----------
    Total Assets Rs 1,651 Rs 1,783 Rs 2,763
    ====== ====== ======

    Liabilities and Equity 2002 2003 2004
    Short-term debt** Rs 21 Rs 30 Rs 145
    Accounts payable 289 504 600
    Accrued liabilities 122 128 111
    Taxes payable -- 17 24
    ---------- ---------- ----------
    Current liabilities Rs.432 Rs.679 Rs. 880
    Long–term debt 354 412 1,188
    Other long-term liabilities 14 12 29
    ---------- ---------- ----------
    Total liabilities Rs. 800 Rs.1,103 Rs.2,097
    Redeemable preferred shares 101 102 103
    Common equity 750 578 563
    ---------- ---------- ------------Total liabilities and equity Rs 1,651 Rs 1,783 Rs 2,763

    Income Statement
    Years Ended December 31
    (Rs in thousands)
    2003 2004
    Net revenue Rs 1,950 Rs 2,114
    COGS 1,413 1,413
    SGA expense 452 471
    ---------- ---------- Operating income Rs 85 Rs 230
    Interest expense 63 81
    ---------- ----------
    Pretax income Rs 22 Rs 149
    Tax expense 8 51
    ---------- ----------
    Net income Rs 14 Rs 98
    ---------- ----------
    * Accounts receivable are net of allowance for doubtful accounts of Rs.46,000; Rs.37,000 and Rs.33,000 for 2002-2004.
    ** Includes current portion of long-term debt of Rs.9,000 and Rs.11,000 for 2003 and 2004.

    You are required to analyse the activity, solvency, liquidity, and profitability ratios for 2003-2004 of Alpha Ltd. Based on your analysis discuss whether the information provided, signals any warning of the company’s eventual demise.

    The Annual Report of Alpha Ltd for the fiscal year 2005 included the following revisions and restatements of previous years’ data:

    (a) The allowance for doubtful accounts was revised to Rs 90,000; Rs 86,000 and Rs 94,000 for 2002-2004, respectively, from the previously recorded amounts of Rs 46,000; Rs 37,000 and Rs 33,000.
    (b) COGS and SGA for 2004 were increased by Rs 12,400 and Rs 5,300 respectively. (Net income was not affected as income tax was reduced by Rs 17,700).
    (c) Previous year’s equity was reduced by Rs 26,000.

    Discuss the relevance of these items to your previous analysis.
  • Mar 26, 2007, 01:34 AM
    Curlyben
    Please refer to THIS ANNOUNCEMENT

  • All times are GMT -7. The time now is 09:18 PM.