2009 december question number 4

Unless specifically told otherwise (which is unlikely) we always assume that the interest is paid at the end of the year and is not added to the loan. This is financial management - double entries are not relevant.

Dear Tutor, I have another question in the same QN. It says 89% of currents assets are financed from short-term source but the remaining of 11% is financed by long-term source and a high proportion of current assets are permanent in nature. Permanent currents mean the core level of investment in current assets and fluctuating means the change in the level of investment.My question here is that how can i know that current assets are permanent in nature ?unless it is meant non-current assets.

However, it says the statement of financial position shows that the company uses trade payables and overdraft as sources of short-term finance.In fact the company has 10 mln long term-loan and how it can be said it uses 89% of current liabilites for short -term finance sources and 11% belong to long-term finance sources.

None of what you have written is mentioned in Q4 of the December 2009 exam.

Dear Tutor, my last questions cover question 4's part c and there has been mentioned 89 and 11 percantage.

I do apologise. I was away from home when I answered your latest question and I was looking at the Paper AFM exam by mistake :-) The rest of the long-term finance is being used to finance non-current assets.

Dear tutor, in fact long term loan is more than short term loan and why it falls more percentage of financing to short term liabilities.it is not understandable for me.

The current assets are 4.6m. 4.1m (or 89%) of this is financed by short term finance (the current liabilities) and therefore the remaining 0.5m (or 11%) is being financed by long-term finance.

but 4.1 current liabilities but 10mln is long term liability and how the more per centage falls to shor term liabilities.

The answer is calculating how the current assets are being financed, and I have explained - 4.1m is from short-term finance and therefore the remaining 0.5m is from long term finance. Obviously the total long-term finance is a lot more than 0.5m, but I have explained this earlier also - the rest of the long-term finance is financing non-current assets.

Dear Tutor understood.

You are welcome :-)