Question

Summary balance sheet data for Greener Gardens Co. is shown below (in thousands of dollars). The company is in a highly seasonal business, and the data show its assets and liabilities at peak and off-peak seasons: Peak Off-Peak Cash $ 50 $ 30 Marketable securities 0 20 Accounts receivable 40 20 Inventories 100 50 Net fixed assets 500 500 Total assets $690 $620 Payables and accruals $ 30 $ 10 Short-term bank debt 50 0 Long-term debt 300 300 Common equity 310 310 Total claims $690 $620 From this data we may conclude that a. Without cash flow data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy. b. Greener Gardens' current asset financing policy calls for exactly matching asset and liability maturities. c. Greener Gardens' current asset financing policy is relatively aggressive; that is, the company finances some of its permanent assets with short-term discretionary debt. d. Without income statement data, we cannot determine the aggressiveness or conservatism of the company's current asset financing policy. e. Greener Gardens follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

Answer 1

Answer:

The answer is E. Gardens follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

Explanation:

The current asset financing policy concentrates on determining the most appropriate method of financing both temporary and permanent current assets.

There are 3 types of working capital financing policy - matching, conservative and aggressive.

In conservative financing policy, a business is required to maintain high levels of current assets in relation to its sales so as to absorb any sudden changes in the sales and thus avoid disruption in the production plans.

Working capital equals total current asset minus total current liability.

For peak period:

Current assets:

Cash. $50

Marketable securities. -

Account receivables. $40

Inventories $100

Total current assets. $190

Current liabilities:

Payables and accruals. $30

Short term bank debt. $50

Total current liabilities. $80

Therefore, working capital is:

$190 - $80

=$110

So Greener Gardens co. has excess working capital to cover for any sudden change in price.

Also for off peak:

Current assets:

Cash. $30

Marketable securities. $20

Account receivables. $20

Inventories $50

Total current assets. $120

Current liabilities:

Payables and accruals. $10

Short term bank debt. -

Total current liabilities. $10

Therefore, working capital is:

$120 - $10

=$110

For both on peak and off peak, the working capital is the same, meaning it is maintain a conservative policy that is dependent on its assets for financing.

Answer 2

Answer: E.) Greener Gardens follows a relatively conservative approach to current asset financing; that is, some of its short-term needs are met by permanent capital.

Explanation: From the data given above, it could be inferred that Greener gardens Co. due to the seasonal nature of its business takes a conservative and measured approach into financing its current asset such as cash, account receivables, inventory, short term liability or debt

using permanent capital in other to shore up running cost or fluctuation which could result due to low revenue during the off peak period and cut the company's spending on certain short term needs.