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Hi John,
In Stanzial Inc (Dec 06) question, while calculating initial working capital amount:
why didn’t we take 70% of the inventory (i.e. 2380 as we calculated it for asset-based valuation as well) as it is mentioned in the other information?
On the SOFP the inventory has presumably been valued at cost and therefore the cost of increasing it by 25% would be based on the cost.
However you would not have lost marks if you had done what you are suggesting.
(There is really a flaw in the question (and this question was set by a previous examiner – the examiner has changed twice since then). On the SOFP the inventory should have been valued at the lower of cost and net realisable value. If the company was going to be liquidated then it would be reasonable that on liquidation the inventory may be worth less and therefore the asset value be reduced. However since the valuation is for the purpose of a takeover then there is no reason why a lower value should be used for the inventory when calculating the asset value.)
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