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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 Current liabilities Overdraft 110 Accounts payable 180 Liabilities Mortgage 650 Owners' equity Shareholders' funds 200 Retained profit 10 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 Current liabilities Overdraft 110 Accounts payable 180 Liabilities Mortgage 650 Owners' equity Shareholders' funds 200 Retained profit 10 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.)
Answer
To calculate working capital, we use the formula:
From the balance sheet:
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Current Assets:
- Accounts receivable: $85,000
- Inventory: $250,000
- Cash: $20,000
Total Current Assets = 250,000 + 355,000
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Current Liabilities:
- Overdraft: $110,000
- Accounts payable: $180,000
Total Current Liabilities = 180,000 = $290,000
Now, substituting these values into the working capital formula:
Thus, 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.
Answer
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Consolidation of Overdraft: One effective strategy would be to consolidate the overdraft into a longer-term mortgage. This approach would reduce immediate repayment pressures and potentially lower interest costs associated with short-term borrowings.
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Implementing Payment Agreements: Negotiating with suppliers for extended payment terms can help manage cash flow more effectively. By aligning payment schedules with cash inflows from sales, Frankie's Discount Barn can better balance its current liabilities.
Step 3
Explain the importance of inventory in the management of working capital.
Answer
Inventory plays a crucial role in the management of working capital, as it represents a significant portion of current assets. Proper inventory management ensures that the business maintains adequate stock levels to meet customer demand without overstocking, which can tie up funds.
Effective inventory management can lead to:
- Reduction in holding costs, which decreases operational expenditure.
- Enhanced cash flow by minimizing excess stock that does not generate revenue.
- Improved customer satisfaction through consistent product availability, thus fulfilling orders on time. Managing these aspects helps maintain a balanced working capital position.