FR – May 2016 – L2 – Q6 – Inventory Accounting (IAS 2)

Calculate the working capital cycle and assess liquidity using specific ratios for Apapta Limited.

Question

The statement of financial position extract of Apapta Limited is given as follows:

	2015 (N’000)	2016 (N’000)
Inventories	3,950	3,250
Receivables	2,151	2,675
Investments (Marketable Securities)	430	375
Cash	565	–
	7,460	6,300
Payables amounts due within one year	(3,865)	(3,755)
	3,595	2,545

Payables are analysed as follows:

Its profit or loss account extract is as follows:

Cost of sales is analysed as follows:

In 2014 and 2015, credit sales were 83% of total sales.

Required:

a. Calculate the working capital cycle for 2015 and 2014. (9 Marks)

b. Compute the ratios listed below and comment on the company’s liquidity over the two years.

i. Cash ratio
ii. Current ratio
iii. Quick ratio (6 Marks)

Answer

a) WORKING CAPITAL CYCLE

Cash Ratio =

Current Ratio =

Quick Ratio =

ii) Comments

Apata Limited’s Liquidity position has improved slightly over the
period as evidenced by the improvement in current and quick ratios.
The improvement noted above can be easily attributable to
reduction in trade receivables period indicating that customers are
beginning to settle their debt in time.
This was also reflected in the company’s cash position, as the
overdraft or deficit cash position in year 2014 improved to a positive
cash flow in year 2015. In fact the other cash and cash equivalent of
the company improved substantially.
The significant improvement in the cash ratio was as a result of the
increase in cash and cash equivalent of the company in addition to
the decrease in receivable collection period.
However, the company’s working capital cycle increased due to the
fact that it takes a longer time for the company to convert its
inventory to sales.