Question

Page 3 of 8 The management of NAZI Construct 2.0 by reducing its short information prov AZI Construction Company wishes to maintain a current ratio of ng its short-term borrowing so as to achieve this result. Using the financial ation provided in the table below, how much of its short-term bank loan should the company repay? Financial Items Cash CA Inventory CA Accounts receivables CA Accounts payable- Short-term bank loan CL Amount (SAR) 400,000 950,000 350,000 550,000 350,000

Answer 1

Current Assets

= Cash + Inventory + Accounts Receivable

= 400,000 + 950,000 + 350,000

= 1,700,000

Let the value of short term bank loan be X

So, Current liabilities

= Accounts payable + Short term bank loan

= 550,000 + X

The expected value of current ratio = 2

So, Current Assets / Current Liabilities = 2

So, 1,700,000 / (550,000 + X) = 2

So, 550,000 + X = 1,700,000 / 2

So, X = 850,000 – 550,000

= 300,000

Now the short term bank loan should be 300,000 in order to maintain a current ratio of 2. But since, the value of short term bank loan is currently 350,000, the loan should be repaid by

= 350,000 – 300,000

= 50,000