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The following is an extract from a business balance sheet - HSC - SSCE Business Studies - Question 20 - 2023 - Paper 1
Question 20
The following is an extract from a business balance sheet. Assets Cash 6 500 Accounts receivable 12 500 Inventory 40 000 Furniture and fittings 16 000 Plant... show full transcript
Worked Solution & Example Answer:The following is an extract from a business balance sheet - HSC - SSCE Business Studies - Question 20 - 2023 - Paper 1
Step 1
Identify the Current Ratio
Answer
The current ratio is calculated using the formula:
ext{Current Ratio} = rac{ ext{Current Assets}}{ ext{Current Liabilities}}From the balance sheet, we find:
- Total Current Assets = 452,500
- Total Current Liabilities = 235,500
Thus, the current ratio is:
ext{Current Ratio} = rac{452500}{235500} \\ ext{Current Ratio} \\ ext{(approx.)} = 1.92Step 2
Evaluate Each Strategy
Answer
Now, we evaluate the proposed strategies:
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A. Sell excess machinery and equipment: This would reduce current assets, likely decreasing the current ratio.
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B. Borrow money on a short-term bank loan: This would increase current liabilities, thus decreasing the current ratio.
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C. Take on a new mortgage to purchase buildings: This would increase both assets and liabilities but does not affect current assets significantly, likely keeping the current ratio unchanged.
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D. Offer a discount to customers for early payment: This strategy would potentially increase cash (current assets) as customers would pay sooner, thus improving the current ratio.
Step 3