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WC

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

  • This topic has 3 replies, 2 voices, and was last updated 1 year ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • April 8, 2021 at 2:25 pm #616454
    Joseph.Andrews
    • Topics: 45
    • Replies: 23
    • ☆☆

    Hello Sir, can you please specify whether it is true what I have written:

    [Point 1] Is it true that we can identify the company’s excessive investment in Long-term Assets by simply taking out the increase in Non-current Assets [we don’t have to calculate any ratio for that?]

    [Point 2] If we have financed working capital from short-term finance then we can clearly see the increase in current liabilities to identify [we don’t have to calculate any ratio?]

    [Point 3] Simply seeing the increase in working capital (which is current assets – current liabilities) with a corresponding increase in short-term borrowing can clearly identify that whether the company has spent its short-term borrowing on working capital or not?

    [Point 4] If the company has increased in long-term Borrowings to finance its Long-term Assets [Is there any ratio for that to know whether the company has spent its long-term borrowing on long-term assets or not – we just see that by the increase in long-term assets with the corresponding increase in long-term borrowing. right?]

    April 8, 2021 at 4:08 pm #616478
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49611
    • ☆☆☆☆☆

    Point 1: I do not understand what you have written because long-term assets are non-current assets.

    Point 2: True

    Point 3: No. Current liabilities include short-term borrowings.

    Point 4: There is no ratio. The total increase in long-term finance (equity plus non-current liabilities) will have either been used to increase non-current assets, or to increase the working capital, or both. By looking at the SOFP you are able to see what it is the money has been used for.

    April 9, 2021 at 6:58 am #616483
    Joseph.Andrews
    • Topics: 45
    • Replies: 23
    • ☆☆

    Point 1 was a typing error. Let me correct it.

    [Point 1]
    Is it true that we can identify the company’s policy whether the company is using long-term or short-term borrowings by looking at the increase & decrease of either the long-term or short-term Borrowing [Because the company can adopt any one of them], Either invest long-term borrowing in long-term assets which can be indicated by the increase in both long-term borrowing & long-term assets to earn profits for long-term prospects.

    Or If the company is investing short-term borrowing in Working Capital [to maintain liquidity problems within the company] which can be indicated by the increase in both short-term borrowing & working capital. [true?]

    I don’t understand your statement about point 3. Let me rephrase.

    [Point 3]
    If a company has raised finance from short-term borrowing which will increase Short-term Borrowing [Current Liabilities] of the company AND therefore, it invests it in working capital for liquidity issues. Isn’t Working Capital be increased because we have already invested in it along with the short-term borrowing?

    April 9, 2021 at 8:16 am #616547
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 49611
    • ☆☆☆☆☆

    Point 1 is correct.

    For point 3 it is not a question of investing short term borrowing in working capital.
    The potential problem is that the company is forced into using overdraft finance (short-term borrowings) because the current assets have increased (due to increased business) but they have not raised the necessary extra long-term finance.

    The important thing for the exam is what I wrote in my first reply in reference to your point 4.

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