SSCE HSC Business Studies Financial management strategies: Balance Sheet of Frankie’s Disco

Balance Sheet of Frankie’s Discount Barn Pty Ltd as at June 2001 Current assets Accounts receivable 85 Inventory 250 Cash 20 Non-current assets Buildings 520 Fittings 275 Total assets 1150 Current liabilities Overdraft 110 Accounts payable 180 Liabilities Mortgage 650 Owners' equity Shareholders’ funds 200 Retained profit 10 Total liabilities and equity 1150 (a) Calculate the working capital for Frankie’s Discount Barn as at June 2001 - HSC - SSCE Business Studies - Question 25 - 2001 - Paper 1

Question 25

Balance Sheet of Frankie’s Discount Barn Pty Ltd as at June 2001 Current assets Accounts receivable 85 Inventory 250 Cash 20 Non-current assets Buildings 520 Fitti... show full transcript

Worked Solution & Example Answer:Balance Sheet of Frankie’s Discount Barn Pty Ltd as at June 2001 Current assets Accounts receivable 85 Inventory 250 Cash 20 Non-current assets Buildings 520 Fittings 275 Total assets 1150 Current liabilities Overdraft 110 Accounts payable 180 Liabilities Mortgage 650 Owners' equity Shareholders’ funds 200 Retained profit 10 Total liabilities and equity 1150 (a) Calculate the working capital for Frankie’s Discount Barn as at June 2001 - HSC - SSCE Business Studies - Question 25 - 2001 - Paper 1

Step 1

Calculate the working capital for Frankie’s Discount Barn as at June 2001. (Show all working.)

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Answer

To calculate the working capital, we use the formula:

$Working ext{ } Capital = Current ext{ } Assets - Current ext{ } Liabilities$

From the balance sheet:

Current Assets = Accounts receivable + Inventory + Cash

$Current ext{ } Assets = 85 + 250 + 20 = 355$

Current Liabilities = Overdraft + Accounts payable

$Current ext{ } Liabilities = 110 + 180 = 290$

Now, substituting these values into the working capital formula:

$Working ext{ } Capital = 355 - 290 = 65$

Therefore, the working capital for Frankie’s Discount Barn as at June 2001 is $65,000.

Step 2

Recommend TWO strategies that could be used to effectively manage current liabilities for Frankie’s Discount Barn.

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Answer

Consolidating Overdraft into a Mortgage: This strategy would allow Frankie’s Discount Barn to convert short-term liabilities (overdraft) into long-term liabilities (mortgage), providing more manageable payment terms and improving cash flow.
Leaseback of Assets: Selling and leasing back assets can provide immediate cash inflow, which can be utilized to pay off current liabilities. This approach ensures that the business retains the use of its assets while improving its short-term liquidity.

Step 3

Explain the importance of inventory in the management of working capital.

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Answer

Inventory management is crucial for maintaining optimal working capital because:

Avoiding Stockouts: Maintaining an adequate level of inventory helps ensure that the business can meet customer demand without delays, preventing lost sales.
Cost Control: Efficient inventory management reduces holding costs and minimizes the risk of obsolescence. This helps to maintain cash flow and thus working capital.
Market Responsiveness: Having the right amount of inventory allows the firm to respond quickly to changes in market demand, enhancing competitiveness and operational efficiency.

Calculate the working capital for Frankie’s Discount Barn as at June 2001. (Show all working.)

Recommend TWO strategies that could be used to effectively manage current liabilities for Frankie’s Discount Barn.

Explain the importance of inventory in the management of working capital.

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