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How to calculate drop in value of current asset of $1280 for proposal 1 ? And what does this amount represent ?
They will be having to pay extra interest of 1280 (960 + 320) and so will have less cash.
1) What about the retained earning part ?
2) For current asset in proposal 2, why we dont deduct $20,000 from the current asset since the money be invested for NCA ?
3) I also having difficulty to find current asset of $63,682 in proposal 3 ? Please help me. Cried already
1. The extra interest means less cash, it also means less profit (and so less retained earnings). This is really financial accounting 🙂
2. The borrow $20,000 (which means more cash) but then invest it in NCA’s (which means less cash). So the net affect on the cash is zero.
3. The funds raised from the sale of the NCA’s is all used to reduce the long-term debt – so this has no effect on the net current assets. There is interest saved on less borrowing of 1296 + 136 = 1432. There is less return on the lost investment of 3750, so less cash of 2750 – 1432 = 2318.
Again this is all really financial accounting. Have you read the examiners explanations in the answer (under the heading ‘tutorial note’?
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