GRADE 11 ACCOUNTING NET CURRENT ASSETS CURRENT ASSETS

GRADE 11 ACCOUNTING

NET CURRENT ASSETS = CURRENT ASSETS – CURRENT LIABILITIES • LIQUIDITY = ABILITY TO SETTLE CURRENT LIABILITIES • CAPITAL IS NEEDED TO PROVIDE • FUNDS TO SET UP INFRASTRUCTURE • LAND & BUILDINGS, EQUIPMENT, VEHICLES • FUNDS TO CONDUCT NORMAL DAY-TO-DAY TRADING OPERATIONS • BUY TRADING STOCK TO SELL TO GENERATE A PROFIT • ALL CAPITAL NEEDED TO BE PLANNED TO SET UP TRADING OPERATIONS • READ EG ABOUT CINDY CELE PG 280

• BUYING ON CREDIT OFFERED BY SUPPLIERS TENDS TO REDUCE THE AMOUNT OF WORKING CAPITAL NEEDED • CHALLENGE = HAVE TO MEET SUPPLIERS CREDIT TERMS BY: • SELLING STOCK & COLLECTING CASH FROM DEBTORS IN A REASONABLE TIME PERIOD. • IDEAL SITUATION = SELLING STOCK & COLLECTING CASH BEFORE SHE NEEDS TO PAY • THIS REQUIRES LESS WORKING CAPITAL • THERE IS A RELATIONSHIP -/- ASPECTS OF BALANCE SHEET & INCOME STATEMENT • ORDER UNDER THE CURRENT ASSETS & CURRENT LIABILITIES SHOW THE TRADING CYCLE

STOCK USUALLY PURCHASED ON CREDIT FROM SUPPLIERS CREDITORS ARE PAID BACK SOME STOCK SOLD ON CREDIT TO DEBTORS SETTLE THEIR ACCOUNT & PAY MONEY

• TRADING CYCLE IS ONGOING – SELDOM SO SIMPLE • TO CONTROL WORKING CAPITAL EFFECTIVELY THE RETAILER MUST ENSURE: • THERE WOULD BE ENOUGH LIQUID FUNDS (CASH) TO SETTLE CURRENT DEBTS (CREDITORS) • STOCK IS SOLD IN A REASONABLE TIME PERIOD – DEPENDS ON NATURE OF GOODS • CASH IS COLLECTED WITHIN A REASONABLE TIME – USUALLY 1 MONTH • ANY SURPLUS LIQUID FUNDS NOT NEEDED IMMEDIATELY SHOULD GET INVESTED TO EARN A RETURN • READ CINDY CELE’S SCENARIO ON PAGE 281

CURRENT RATIO = CURRENT ASSETS : CURRENT LIABILITIES • USED TO ASSES LIABILITY • FOLLOWING E. G. ’S 2 BUS HAVE THE SAME NET CURRENT ASSETS BUT CURRENT LIABILITIES AND CURRENT ASSETS ARE DIFFERENT XX STORES YY TRADERS CURRENT ASSETS R 200 000 R 1 000 CURRENT LIABILITIES R 100 000 R 900 000 NET CURRENT ASSETS R 100 000

• THE CURRENT RATIO FOR THE 2 BUS: • XX STORES • YY TRADERS = = 200 000 : 100 000 = 2: 1 1 000 : 900 000 = 1. 1 : 1 • NORM TO AVOID LIQUIDITY SHOULD BE 2 : 1 • SELDOM APPLIES ANYMORE AS INVESTMENTS ARE MORE FLEXIBLE • A HIGH RATIO COULD ALSO BE A DISADVANTAGE. WHY? • COULD MEAN THAT EXCESS FUNDS ARE TIED UP IN CURRENT ASSETS • SUCH AS TRADING STOCK AND DEBTORS

ACID TEST RATIO = (CURRENT ASSETS – INVENTORIES) : CURRENT LIABILITIES NOTE: INVENTORIES = Trading stock + consumables stores ACID TEST RATIO = (RECEIVABLES + CASH) : CURRENT LIABILITIES NOTE: RECEIVABLES = Trade debtors & other receivables CASH = Cash & Cash equivalents • INTENTION IS TO COMPARE THE ASSETS THAT CAN BE EASILY LIQUIDATED • TESTS THE ABILITY TO MEETS IT’S CURRENT DEBTS WITHOUT BEING FORCED TO SELL ITS STOCK UNDER PRESSURE • FORCED SALE RESULTS IN STOCK SOLD AT LOW PRICE

• FOLLOWING FIGURES ARE OBTAINED FROM THE BALANCE SHEET: CURRENT ASSETS R 600 000 INVENTORIES 240 000 TRADE & OTHER RECEIVABLES CASH & CASH EQUIVALENTS CURRENT LIABILITIES TRADE & OTHER PAYABLES 300 000 60 000 R 330 000 • ACID TEST RATIO = (300 000 + 60 000) : 330 000 = 1. 1 : 1

RATE OF STOCK • NEED TO DECIDE ON APPROPRIATE LEVELS OF STOCK FOR YOUR LINE OF BUSINESS AND • TO ENSURE THAT STOCK IS SOLD WITHIN A REASONABLE PERIOD OF TIME • THE MORE EFFECTIVE BUSINESS CAN TURN OVER STOCK THE MORE EFFECTIVE IT WILL BE IN GENERATING PROFITS • THERE IS NO ‘CORRECT’ OR ‘INCORRECT’ STOCK TURNOVER RATE. • POLICY ADOPTED DEPENDS ON TYPE OF PRODUCT SOLD • READ EG OF FF FASHIONS ON PAGE 284 • IF A LOT OF WORKING CAPITAL IS TIED UP IN STOCK IT COULD LEAD TO LIQUIDITY PROBLEMS.

RATE OF STOCK TURNOVER RATE = Cost of Sales average Stock NOTE: Average stock = (Opening stock +STOCK Closing. IS stock)/2 • REPRESENTS THE NUMBER OF TIMES REPLACED DURING THE YEAR • EXAMPLE ON PAGE 284: • AVERAGE STOCK = (150 000 + 90 000)/2 • STOCK TURNOVER RATE = R 480 000/R 120 000 = 4 TIMES

PERIOD FOR WHICH ENOUGH STOCK IS ON HAND = Average Stock x 365 Cost of Sales 1 NOTE: Trading stock may be Average stock or Closing stock depending • ESTIMATE HOW LONG IT WILL TAKE TO SELL THE STOCK on circumstances • NB!! ANSWER IS EITHER IN DAYS OR MONTHS • IF MONTHS THEN X 12/1 • PERIOD = R 120 000 X 365 = 91 DAYS R 480 000 1