Mixture

Hi Sir

I’m really sorry, this is another long one!

Objective test question

If an early settlement discount is offered, will it always lead to a reduction in current ratio, all else remaining equal (i.e. no increase in credit sales), because, if receivables fall, but there’s a discount, then the cash deposits (or overdraft balance) will not fall by the same extent the receivables fall by (because of the discount offered) and if admin cost increase, would this just compound the issue, leading to an even bigger decline in the current ratio?

Long form question

In the June 09 paper – I noticed that current liabilities were forecasted to constitute a smaller proportion of the current assets in the next year, which I thought, suggested that the working capital funding policy had become slightly less aggressive (current liabilities constituted 11% less of current assets), but then I couldn’t find any evidence that long term loans had increased and so I was baffled about where the rest of the finance came from (for the 11% of current assets no longer covered by current liabilities). I thought that this might mean that there could be a financing gap that crystallises at some point and that they were actually running a greater risk of becoming illiquid – I thought this because I couldn’t see any cash balances, from the retained earnings, to suggest that they had put money aside for precautionary purposes, like an insolvency risk. Would it be fair to suggest what I just said or would we have to take it, that although the use of the retained earnings was undisclosed, that part of the retained earnings must have been used to finance the 11% of current assets that current liabilities no longer cover and so the current working capital funding policy is in fact less aggressive?

I also noticed, in the mark scheme, that they referred to the longer receivables, inventories and payables days as a deterioration in ‘the working capital position’ can we infer this from data: that longer receivables and payables days are indicative of a worsening in the working capital position or do we need to acknowledge that it could be part of a deliberate credit expansion strategy to drive competitiveness and sales? Would it be a good idea to try to support this (worsening of working capital position), if we have the turnover, with a sales/working capital ratio decline?

Exam Questions

This is going to sound like a silly question, but could I confirm, when a question, in F9 says ‘evaluate’ for example ‘evaluate whether the early settlement discount should be offered’ – that the question doesn’t require any discursive analysis, just calculations with a simple statement addressing the question, at the end? I’m asking because sometimes I write a whole page and the mark scheme has no written analysis and I’m afraid I could do this in the exam and run out of time.