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Current Ratio for the Year 2007

   

Added on  2020-03-04

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Accounting Assessment -11 | Page

Table of ContentsSolution 1).......................................................................................................................................3Solution 2).......................................................................................................................................5References........................................................................................................................................9Appendix..........................................................................................................................................92 | Page

Solution 1)Part (a)Current ratio is the company’s ability to repay its debt. In Other words, current ratio is theliquidity ratio that measures the company’s ability to repay its debt in short term generally 12month. Current ratio is also called working capital ratio. Current ratio for the year ended 2007 is 1.720 which has decreased from the previous year whichwas 2.07. This current ratio of the company states that company is in better position to pay off itsliabilities. But if we see at the industry’s current ratio i.e. 1.760, which is higher than ourcompany’s current ratio, it indicates that company is not in good condition to repay its liabilities. Quick ratio is also called acid test ratio, or liquid ratio. It indicates how the company is able topay off its short term liabilities. Quick ratio is the indicator of company’s short term liability.Lower the quick ratio means that company’s liquidity position is not satisfactory, where ashigher the quick ratio better the company's liquidity position. Quick ratio for the year 2007 is0.198 which has decreased from the previous year from 2.07. This quick ratio states thatcompany is not in good condition to pay off its short term liabilities as compare to industrycapabilities to pay off its debts as the quick ratio of industry is 0.78. (Baridwan, 2013)3 | Page

Part b)The Super Cheap Auto Group Limited has a combination of both forms of finances that is longterm and short term. From the cash flow statement, it can be noticed that company is regular inpayment of its liabilities. Along with principal amount the company has also paid interestamount on time. The company has earned sufficient profits, which indicates that company is alsoregular in paying the dividends to its shareholders. But at the same time company is not incondition to pay off its short term debts on time. From the cash flow from operating activity itcan be identified that there is increase in the borrowing cost during the year 2007 which indicatesthat the company has made extra borrowings during the year.Part c) Inventory turnover ratio is the ratio that shows how many times the company's inventory is soldand replaced for a period of time. Inventory turnover ratio is calculated as follows- Inventory turnover ratio = sales/average inventory Hence, the inventory turnover ratio of Super Cheap Auto Group Limited during the year 2007 is1.659 which has decreased from the previous year which was 1.66.Working Capital Management enables to determine that the company is able to continue itsoperations and has sufficient cash inflow and outflow to satisfy companies’ requirements. TheCompanies receipt has increased in year 2007 as compared to previous year from 581,016 to689,172. The net working capital of the company is positive, which indicates that company isable to continue its operations, it represents that short term to current assets are not secured bylong term assets.Part d)No, the Super cheap Auto should not borrowed extra fund as the current debt of the company ishigh and borrowing the extra fund will create impact over the solvency position of the company.Also there is increase in interest cost of the company from the previous year and borrowing extra4 | Page

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