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Kindly can anyone explain me the following two issues for above said question :
I am not understanding the answer please guide me your response will be highly appreciated.
1-How is interest payable calculated ?
2-How is Change in working capital calculated?1. The interest payable is calculated (as per the instructions in the question) on the balances owing at the start of the year.
So in the first year the interest is (580 x 8%) + (230 x 7%) = 62.5
In the second year it is (580 x 8%) + (266 x 7%) = 65.02
and so on2. The question says the stock, debtors, cash in hand, and other creditors increase in proportion to the increase in sales, which is 9% next year, 8% the year after and so on.
In 2004 stock was 448, therefore it need to be 448 x 1.09 = 488 in 2005, which means an increase of 40. It is the same approach for debtors, cash in hand, other creditors and in future years.thankyou for explaining
but I have still few questions as to why we use 230*1.07 in 2005 when infect 2005 short term borrowing is 266?
do we assumed that interest is payable in arrears?And as for as working capital is concerned i am able to calculate the 2004 to 2008 figures but how did we get Change in working of 15, 27, 0 and 56 for our next four years ?
The question specifically says in note (vi) that any changes in interest paid may be assumed to be effective in the next year. So the interest is based on the balances at the end of the previous year.
The working capital at the end of 2004 was 1,032 – 702 = 330
At the end of 2005 it is 1125 – 780 = 345
So there is an increase of 15.At the end of 2006 it is 1,215 – 843 = 372.
So an increase that year of 27.And so on 🙂
Thankyou so much
Its such a wonderful learning environment.
I had a confusion in note (vi) but its understood now.
Opentution is the best
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