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MGT201 GDB Solution # 1 Fall 2021

GDB 69
MGT201 GDB Solution # 1 Fall 2021

MGT201 GDB Solution # 1 Fall 2021

MGT201 GDB Solution # 1 Fall 2021

GDB No.  1
Semester: Fall 2021

Question Description

Financial Analysis

Financial analysis is among the key functions of financial management, it helps in deciding about the performance of the companies based on comparisons. Among various ratio analyses, liquidity analysis allows companies to analyze their ability to manage short term obligations.

This analysis is significant if it is a relative analysis in which comparison is made with some benchmarks. Such comparisons help companies to improve their position and to take right decision about management of various components of working capital that can ultimately improve their liquidity position.

Required:

Following information has been extracted from the financial statements of ABC Company to analyze liquidity position of the Company based on current ratio.

1. If an industry bench mark of current ratio is 2:1, calculate current ratio of ABC Company from the following data and compare it with industry bench mark.

MGT201 GDB Solution # 1 Fall 2021

2. Calculate current ratio if company has decided to use Rs. 200,000 to pay off short term debt. Discuss whether company’s decision to pay off sort term debt with cash is right to improve the liquidity position? Why or why not?

Important Instructions:

  • Post your GDB comments (answer) against GDB # 01 rather than against lessons’ MDB.
  • Your discussion must be based on logical facts.
  • Do not copy or exchange your answer with other students.  Two identical / copied comments will be marked Zero (0) and may damage your grade in the course.
  • Books, websites and other reading material may be consulted before posting your comments; but copying or reproducing the text from books, websites and other reading materials is strictly prohibited. Such comments will be marked as Zero (0) even if you provide references.
  • Obnoxious or ignoble answer should be strictly avoided.
  • Questions / queries related to the content of the GDB, which may be posted by the students on MDB or via e-mail, will not be replied till the due date of GDB.

MGT201 GDB Solution # 1 Fall 2021

Solution:

MGT201 GDB Solution # 1 Fall 2021

1. 

Benchmark of the company is 2/1

We should calculate the current ratio which is equal to = current assets / current liabilities

 Where

Current Assets = Cash+ Inventory+ Accrued Receivables + Marketable Securities

= 400,000 + 150,000 + 100,000 + 200,000

= 850,000

Current Liabilities = Account Payables + Short term debts + Accruals

= 100,000 + 150,000 + 250,000

= 500,000

Current Ratio = 850,000/500,000

Current Ratio = 1.7/1

It is lower than the benchmark

2. 

If a company wants to pay off its short-term MGT201 GDB Solution # 1 Fall 2021 debts of Rs 20,000 we will deduct the value of Rs 200,000 from cash in Current assets and from short-term debts in current liabilities.

 Current Assets = 850,000 + 200,000

= 650,000

Current Liabilities = 500,000 + 200,000

= 300,000

Now again calculate the value of Current Ratio

= 650,00/300,000

= 2.1/1

This is higher than the benchmark so the company should pay off its short-term debts.

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MGT201 GDB Solution # 1 Fall 2021

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