uedse n tade recelvables Rs 4 lakh 6.Increase in trade payables Rs 2 lakh -t SEC
ID: 2600152 • Letter: U
Question
uedse n tade recelvables Rs 4 lakh 6.Increase in trade payables Rs 2 lakh -t SECTION B R Qs 1 Central Bank has been approached b y two customers for a short-term loan of Rs 3000 The following summarized financial information is available from the latest financial statements DL Fashion Ltd (Rs) BL Fashion Ltd (Rs Net sales 72,800 24,020 1,200 6,500 7,000 9,000 4,000 900 16,680 19,000 21,000 Interest expense Income tax Profit after tax Inventories Receivables CH 65,000 19,500 700 5,000 4,500 Cash Current liabilities Non-current liabilities 2,200 1,200 7,200 22,000 Shareholders equity The bank intends to accept one of the two loan proposals. Required Which customer's loan request should be accepted and why? What additional information may be useful in making a decision? Assume that the year-end account balances are representative of the whole year. Qs 2 Two firm's ABC Ltd and XYZ Ltd, sell identical products in the same market. Their budgeted profit and loss accounts for the year ending on 31 March 2018 are as follows:
Explanation / Answer
The bank will assess the short-term solvency or the liquidity position of the companies so as to know the financial capability to meet short-term obligations that are bound to arise, with in a time period of 1 year or some shorter period. This is done by analysing 2 short-term solvency ratios , Current Ratio & quick ratio DL Fashion Ltd. BL Fashion Ltd. Current Ratio Current Assets/Current Liabilities (9000+4000+900)/16680= (3500+2200+1200)/7200= 0.83 0.96 Quick Ratio (Current Assets-Inventory)/Current Liabilities (13900-9000)/16680= (6900-3500)/7200= 0.29 0.47 Going by the above, the Bank is more likely to accept BL Fashion Ltd.'s loan request ,as both its current ratio & quick ratios are better than DL Fashion Ltd.---indicating better current/liquid asset backing & capacity to repay its loan.
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