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Hi,
The question below is number 64 in the P2 CIMA Official Exam Practice Kit by Kaplan Publishing. I am having trouble reconciling this answer.
Q: “A company evaluates its performance using a number of key ratios. This includes the current ratio which is targeted not to fall below a value of 1.7. Forecasts for the elements of working capital are inventory $14,800, receivables $19,600 and payables $144,000.
What is the minimum budgeted bank balance permitted if the company is to achieve its target?”
The suggested answer is as follows: “Current assets must be 144,000 x 1.7 244,800. Bank must be 244,800 – 14,800 – 19,600 = 210,400.”
I got a different answer through algebra. Let “X” be bank.
Current Assets: 14,800 + 19,600 > 1.7
Current Liab: 144,000 + X.: 34,400 = 1.7 (144,000 + X) .: (34,400/1.7) = 144,000 + X
.: 20,235 = 144,000 + X .: X = (123,765)or 34,400 = 244,800 + 1.7X .: (210,400 / 1.7) = X .: X = (123,765)
I think in their usually oversimplified way of explaining the answer they forgot to divide the final number by 1.7.
Could you please let me know which is the correct, thank you.
Hi
I got the answer $210,400 also.As you know, the current ratio is current assets/ current liabilities
if Current ratio = 1.7 and current liabilities are given as $144,000
1.7 = current assets/ 144,000
rearranged
1.7 * 144,000 =244800 (this tells us for current ratio to be 1.7 the current assets total value must equal 244800)If we know the value of inventory and receivables then,,,, $244800 -14800 -19600= 210400
This balancing figure must be the bank balance…Final check:
1.7 = (14800+19600+210400) /144000
This comes back as planned.*** I think in your workings you’ve classed Bank to be a liability -im not sure why?***
Oh, I must have confused Bank Balance with an Overdraft (short-term liability).
Thank you.
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