- May 10, 2021 at 12:32 pm #620209
How to know whether the company has used long-term or short-term finance & whether the company has used that finance to be invested in long-term assets or short-term assets?
Do we’ve to calculate any specific ratios to know this?May 10, 2021 at 2:53 pm #620225
It depends on the information given, but normally you are given the SOFP and can tell from there.
From the SOFP you know what the total long-term finance is, you know how much of it is invested in non-current assets and therefore you know how much is invested in working capital. You also know from the SOFP any short-term borrowings.May 10, 2021 at 11:49 pm #620263
I have few questions related to WC Financing & Investment. Please could you clear out my doubts that I put in points. I would be Thankful! 🙂
[I was attempting to question Wobnig Co from BPP kit where we’re told that long-term is $4000 which remains constant & overdraft of $1500 which was increased immensely from one period to another]
1) Seeing this we’re pretty sure that company has raised short-term borrowing (overdraft) to finance its assets. BUT how do we know that the company has invested this finance in short-term assets or long-term assets?
2) Since the long-term borrowing is constant but we can see the increase in fixed assets which is $15,284 in current period. Is it correct that we have used short-term borrowing to finance fixed assets?
3) On the other hand, short-term borrowing is increased immensely which is $1500 in current period & we can see the increase in current assets which is $5,349. Therefore, we can see that company has short-term borrowing used to finance current assets.
4) Do we have to make an assumption that short-term borrowing is used for short-term assets (current assets) & long-term borrowing is used for long-term assets (fixed assets)?
5) Also, there is an interest expense given in SOPL of $355 which has increased from the last year! BUT again how do we know whether this interest is caused by the increase in short-term borrowing or it is caused by long-term borrowing?
6) Is it true that in the exam we’re either given the increase in short-term borrowing & long-term remain constant (like in Wobnig Co) OR we’re given short-term borrowing to be constant & long-term borrowing is increasing [It is either this or that – Is that correct?].
If we’re given that both short-term & long-term borrowings are increasing, then how would we identify whether the increase in interest is caused by the short-term or long-term borrowings!?May 11, 2021 at 8:18 am #620278
The non-current assets have increased by $682. The long term finance has increased by $727. Therefore the difference is invested in working capital. The rest has come from short-term finance.
This answers most of your questions 🙂
The interest on the long-term borrowings is 7% x 4,000 = $280 (it says in the SOFP that they are 7% bonds). Therefore the rest of the interest must be interest on short-term borrowings.May 11, 2021 at 3:31 pm #620312
Sir, could you please respond to these questions:
1) Do we have to make an assumption that short-term borrowing is used for short-term assets (current assets) & long-term borrowing is used for long-term assets (fixed assets)?
2) Is it true that in the exam we’re either given the increase in short-term borrowing & long-term remain constant OR we’re given short-term borrowing to be constant & long-term borrowing is increasing [OR examiner can ask both increase in short-term & long-term borrowings in a question?]
3) If we’re given that both short-term & long-term borrowings are increasing, then how would we identify whether the company is using Aggressive Policy or Conservative Policy to finance its assets?May 11, 2021 at 5:10 pm #620325
It is not that you assume anything – your job is to interpret the SOFP’s (and any other information given in the question) and be able to therefore state that it suggests they are operating a conservative or an aggressive policy (you can never say for certain just on the basis of one or two SOFP’s).
Non-current assets should always be financed using long-term finance so any extra non-current assets will be using some of the extra long-term finance that has been raised.
You need to look as to how much of the remaining long-term finance raised has been invested in working capital and how much of the extra working capital has therefore been financed from short-term finance.
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