Accounting 001

Topics: Money, Debt, Creditor Pages: 8 (1482 words) Published: March 12, 2013
1. Is Nadipha’s Dress Shop in a good or bad liquidity position on 28 February 2007? Quote the appropriate liquidity ratios in your answer. |
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The current ratio has increased by 0.33 from the previous year. This is good because the business has more money to pay back the liabilities. It is a good increase because now she has increased liquidity this year but it could be better because the norm is usually 2:1. This is 0.15 below the norm. she could look at other businesses to see who is competing with her and what she could do to increase sales to have more money. The acid-test ratio has increased by 0.14. this is not good because it shows that the business cannot pay back it’s liabilities without being forced to sell it’s trading stock. This is worrying. The norm is usually 1.1:1 but Nadipha is 0.33 below the norm. she must look into this. Hopefully Nadipha has some personal cash or a finance facility which she could draw on if she needed to. Overall Nadipha’s business liquidity is alright but she could improve on her asset-test ratio as it does look on the low side. 2.1 Calculate period of stock on hand (in days)

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2.2 Calculate the average payment period by debtors (in days) |
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2.3 Calculate the average creditors payment period (in days) |
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2.4Comment briefly on the above calculations. Are these appropriate for Nadipha’s Dress Shop? The average time in days in which debtors will pay is 43 days. This is worrying because her debtors only pay after 43 days and this is 13 days afte her debtor policy. She needs to introduce incentives to pay early or penalties / interest to people who pay late, this would also increase the amount of cash so she can purchase new stock and boost cash on hand for the business.

The period of time we will pay creditors is 32 days. This is worrying because she is paying earlier than the creditors policy. She could use this money to purchase more stock. Sh should be making full use of her creditors policy which is 60 days.

By reducing the days in which her debtors pay and by using the full policy of her creditors, this would relate to days of stock on hand of having cash on hand for extra 41 days (13.09 + 27.60 = 40.69). This could help her bring in a bigger range of stock that turns more well.

3. Cash budget for the period 1 March to 31 May
| MARCH| APRIL| MAY|
RECIEPTS:| | | |
Cash sales| 52800| 24000| 24000|
Trade debtors| 15000| 45096| 32688|
TOTAL RECIEPTS:| 67800| 69096| 56688|
PAYMENTS:| | | |
Interest on loan| 1400| 1400| 733|
Trade creditors| 29091| 70400| 32000|
Loan repayments| -| -| 50000|
Other overhead expenses| 7500| 7500| 7500|
Nadipha’s drawings| 6000| 6000| 6000|
Moving costs| -| 15000| -|
TOTAL PAYMENTS:| 43991| 100300| 96233|
Cash surplus/ shortfall| 23809| (31204)| (39545)|
Bank balance at beginning of the month| 28000| 51809| 20605| Bank balance at the end of the month| 51809| 20605| (18940)|

4.1. Is Nadipha’s Dress Shop likely to experience a liquidity problem within the next three months? Explain the main reasons for your answer. Yes, according to the cash budget she will in may not have enough cash to cover her liabilities and expenses. She will need R 18940 to have enough cash to cover these costs. This is because she is spending to much mone on things like moving costs and trade creditors. She spent R79400 in April on payments to creditors. She must control her spending and keep an eye on it. Her expenses are too high. She needs to analyze how she may cut down on spending costs. 4.2 Nadipha is hoping to place a ull-page colour advertisement in the local press for the entire month of March and she is hoping to open a second shop in Khayelitsha in June. In your opinion,...

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