Photo AI
3. (a) Using the figures below calculate the Current Ratio for 'Sentry Ltd' - Leaving Cert Business - Question 3 - 2013
Question 3
3. (a) Using the figures below calculate the Current Ratio for 'Sentry Ltd'. (Show your workings) Debtors €12,000 Bank Overdraft €20,000 Cash €15,000 Creditors €50... show full transcript
Worked Solution & Example Answer:3. (a) Using the figures below calculate the Current Ratio for 'Sentry Ltd' - Leaving Cert Business - Question 3 - 2013
Step 1
Using the figures calculate the Current Ratio:
Answer
To calculate the Current Ratio (CR), we need to determine the current assets (CA) and the current liabilities (CL).
Step 1: Identify Current Assets (CA)
- Debtors: €12,000
- Cash: €15,000
- Closing Stock: €8,000
Total Current Assets:
Step 2: Identify Current Liabilities (CL)
- Bank Overdraft: €20,000
- Creditors: €50,000
Total Current Liabilities:
Step 3: Calculate the Current Ratio
Step 2
Comment on the liquidity position of Sentry Ltd:
Answer
Sentry Ltd has not managed to attain the recommended current ratio of 2:1, indicating potential liquidity issues.
-
Liquidity Issues: Sentry Ltd is not liquid and is overtrading, meaning it cannot pay its debts as they arise, which can lead to financial distress.
-
Difficulty in Payments: The company will likely face challenges in raising cash quickly and might struggle to pay its bills as they come due.
-
Importance of Healthy Working Capital: Maintaining a healthy working capital is essential for a business’s cash flow. Currently, Sentry Ltd only has €0.50 available to pay for every €1 of liabilities, which is concerning and could jeopardize its financial stability.