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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 (S) 6 500 Accounts receivable (S) 12 500 Inventory (S) 40 000 Furniture and fittin... 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, the current assets total to 235,500. Therefore, the current ratio is:
ext{Current Ratio} = rac{452,500}{235,500} eq 1.92Step 2
Evaluate Each Strategy
Answer
We will assess each strategy's potential effect on the current ratio:
A. Sell excess machinery and equipment: This would decrease assets, potentially lowering the current ratio, as current liabilities remain unchanged.
B. Borrow money on a short-term bank loan: This increases current liabilities without a corresponding increase in assets, likely reducing the current ratio.
C. Take on a new mortgage to purchase buildings: This is a long-term liability and would not directly improve the current ratio since current liabilities do not change.
D. Offer a discount to customers for early payment: This could increase accounts receivable, therefore increasing current assets while not affecting current liabilities, effectively improving the current ratio.
Step 3