Exercise - evaluating going concern Snow Co is a manufacturer of textiles and soft furnishings which...
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Exercise - evaluating going concern Snow Co is a manufacturer of textiles and soft furnishings which it supplies to retail organisations. The company's revenue has reduced by 20% in the year to 31 March 20X4, and its operating margin has fallen from 15% to 12%. Snow Co has a long-term loan outstanding of $80,000 with a covenant attached, which states that if the current ratio falls below 0.75, the loan can be immediately recalled by the lender. The company's current assets are $670,000 at 31 March 20X4, and its current liabilities are $900,000. The sales director of Snow Co, Maggie Flood, resigned in February 20X4, and management is struggling to find a suitable replacement. One of the reasons for Maggie's resignation was the loss of a significant contract to supply a chain of home furnishings stores which accounted for 25% of Snow Co's revenue in the last 12 months. 1. What is current ratio (to 2 decimal places)? 2. Which of these are indicators that Snow co may be facing going concern difficulties at 31 march 20X4? a. Decreasing revenue and operating profit margins indicate that Snow Co is struggling to maintain its financial performance. b. Declining profitability always signals a major going concern issue even in the short term c. The current ratio indicates that current liabilities can still be met from current assets d. If liabilities to tax authorities or supplies are not met, liquidation (winding-up) proceedings may be commenced e. The loan covenant has not yet been breached f. Maggie Flood was key management personnel Exercise - evaluating going concern Snow Co is a manufacturer of textiles and soft furnishings which it supplies to retail organisations. The company's revenue has reduced by 20% in the year to 31 March 20X4, and its operating margin has fallen from 15% to 12%. Snow Co has a long-term loan outstanding of $80,000 with a covenant attached, which states that if the current ratio falls below 0.75, the loan can be immediately recalled by the lender. The company's current assets are $670,000 at 31 March 20X4, and its current liabilities are $900,000. The sales director of Snow Co, Maggie Flood, resigned in February 20X4, and management is struggling to find a suitable replacement. One of the reasons for Maggie's resignation was the loss of a significant contract to supply a chain of home furnishings stores which accounted for 25% of Snow Co's revenue in the last 12 months. 1. What is current ratio (to 2 decimal places)? 2. Which of these are indicators that Snow co may be facing going concern difficulties at 31 march 20X4? a. Decreasing revenue and operating profit margins indicate that Snow Co is struggling to maintain its financial performance. b. Declining profitability always signals a major going concern issue even in the short term c. The current ratio indicates that current liabilities can still be met from current assets d. If liabilities to tax authorities or supplies are not met, liquidation (winding-up) proceedings may be commenced e. The loan covenant has not yet been breached f. Maggie Flood was key management personnel
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Answer rating: 100% (QA)
The current ratio is a liquidity ratio that measures a companys ability to pay shortterm obligations or those due within one year It is calculated by ... View the full answer
Related Book For
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen
Posted Date:
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