PEV June 2007 2.1C (iii)

Lizy

Please can someone help me on the above question, calculation of increase in trade creditors, short term borowing and a decrease of long term borowing. I am stock with this question.

definite.studies

From the change in material prices you should have a new operating profit of £318,000.

In scenario 2, if you replace the old figures for current assets and current liabilities with the new figures given above part c) (remembering to add a new current liability for the borrowing), replace the old LT borrowing with the new one, then you can recalculate the Net Assets.

Using the new Operating Profit should give the same Net Assets on the bottom line.

Hope this helps!

definite.studies

Although what I did above was recalculate the entire scenario 2 budget by crossing out the old figures on the question paper and recalculating with the new figures. Looking at the answer, it seems they expect you to start with the old profit and asset figures and make adjustments according to the changes in costs and assets / liabilities.

I think there is no harm in doing what I did in rough working to see what figures you expect, but for the exam answer you need to find the differences. I would write the new budget figures next to the old ones on the question paper and then alongside them write down the differences in terms of the effect on the net current assets. ie increases in current assets are positive, decreases are negative. For current liabilities or LT borrowing decreases are positive and increases are negative in their effect on the Net Current Assets.

Lizy

Thank you