Fig. 1 shows information from the statement of financial position of CycleFix, a mobile bicycle repair business. Azeem owns the business and is considering ...
Question 1 Report
Fig. 1 shows information from the statement of financial position of CycleFix, a mobile bicycle repair business. Azeem owns the business and is considering the option of buying a second repair van. He has been advised that the current ratio should be checked before cash is used for the van. All values are in £000.
(a) Calculate the working capital of CycleFix. Show your working. [2]
(b) Calculate the current ratio of CycleFix. Give your answer in the form x:1. [2]
(c) State one reason why a lender may use the current ratio when deciding whether to lend money to CycleFix. [1]
(d) Analyse one possible effect on CycleFix if Azeem uses all of the cash shown in Fig. 1 as a deposit for the new van. [3]
Answer Details
(a) Working capital is current assets minus current liabilities:
\[\pounds36\,000-\pounds24\,000=\pounds12\,000\]
CycleFix has working capital of £12,000. [2 marks]
(b) Current ratio:
\[\frac{\pounds36\,000}{\pounds24\,000}=1.5:1\]
The current ratio is 1.5:1. [2 marks]
(c) A lender uses the current ratio to assess whether CycleFix is likely to be able to pay its short-term debts, or current liabilities, when due. [1 mark]
(d) Using all the cash as a deposit reduces cash by £8,000. Current assets and working capital will therefore fall. This may make it harder for CycleFix to pay suppliers, wages, and other current liabilities on time, reducing liquidity. [3 marks]
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