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MGT 201 Please Provide The Solution

Topic : Analysis of Financial Statments

Discussion Question:

Working capital management is a crucial task for the companies to maintain short term liquidity of their business. It includes management of all constituents of working capital and ignorance of any element can cause serious liquidity issues. Changes in one of these elements affect the overall working capital of the company. Cargo Intel has to pay Rs. 250,000 to its creditors without sacrificing the liquidity. Company also aims to make payment to creditors without increasing the current liabilities. Among various measures of liquidity ratio; management has decided to use “Quick Ratio” as a measure of liquidity. Company has following two options to make payment to creditors:

Option 1. Using cash of Rs. 150,000 and selling marketable securities of Rs. 100,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Option 2. Taking short term loan of Rs. 220,000 and selling marketable securities of Rs. 30,000 for the payment to creditors (NOTE: ignore profit or loss on sale of marketable securities)

Following information has been extracted from financial statements of the company for the current year:

Particulars

Rs.

Cash

600,000

Fixed assets

4,000,000

Short term debt

300,000

Marketable securities

170,000

Account receivables

630,000

Creditors

710,000

Inventory

400,000

Accruals

75,000

Long term loan

500,000

Machine and equipment

8,000,000

You are required to calculate:
Quick ratio before using any option
Quick ratio for option 1
Quick ratio for option 2
Which option you will suggest considering the stated objectives of the company. Support your selection with reasoning.

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