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overtrading

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › overtrading

  • This topic has 5 replies, 2 voices, and was last updated 9 months ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • October 6, 2021 at 2:58 am #637075
    johnbriane
    • Topics: 146
    • Replies: 147
    • ☆☆☆

    sir in the lectures when the illustration 1 was done ,

    the inventory were increased as it doubled
    the receivables were increased as it doubled
    and sir increased the payables as it doubled as well

    but why did not the cash get doubled ?

    i wonder why

    October 6, 2021 at 7:50 am #637108
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49617
    • ☆☆☆☆☆

    That is the whole problem with over-trading.

    If they had planned properly and raised more long term finance then they would be able to have double the cash. Because they have not raised more long-term finance they are forced into cash problems because the finance for the extra receivables and inventories has to come from somewhere.

    October 6, 2021 at 2:14 pm #637132
    johnbriane
    • Topics: 146
    • Replies: 147
    • ☆☆☆

    Thank you sir

    The difference between
    Current assets and current liabilities is working capital

    Can we also calculate the working capital by simply looking at the differences between

    The equity and non current assets ?

    October 6, 2021 at 3:26 pm #637138
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49617
    • ☆☆☆☆☆

    No we cannot.

    The working capital is the difference between the total long-term finance and the non-current assets, and the total long-term finance is the equity plus the debt finance.

    October 6, 2021 at 7:44 pm #637152
    johnbriane
    • Topics: 146
    • Replies: 147
    • ☆☆☆

    Sir working capital can be found in 2 ways

    Way 1 is current assets less current liabilities

    Way 2 is equity + long term debt ?

    Long term finance which is equity + debt is also known as capital employed right sir

    October 7, 2021 at 9:05 am #637185
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49617
    • ☆☆☆☆☆

    Way 2 is not correct. It is equity + long term debt (which is the capital employed) less the non-current assets.

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