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Financing the Short Term Obligations of The Business - Coursework Example

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Financing the Short Term Obligations of The Business

Trade Credit implies the allowance of credit businesses by the providers of raw materials and other equipment. In this type of financing, though no cash is allotted to the business, but it is given the liberty to delay the payment for the goods up to the termination of the credit. Bank Credit is another popular source of short term financing which allows businesses to draw credit at once or in phases. There are various sub-categories of Bank Credit such as Loans, Cash Credit, Overdraft and Discounting of Bill. The third short term financing source is Customers’ Advances in which businesses ask customers to pay a part of their payment in advance. This is often the case when orders are large as it facilitates the company to overcome its short-term necessities. The fourth source is Account Receivables which are sold to bank or any other finance company through Factoring. In this manner, the business selling the receivables gets the amount while the finance company takes over all the associated credit risks (World Academy Online, 2011) Task 2 1. Activision Blizzard Inc as well as Electronic Arts Inc. have financed their short term requirements mainly through Bank Credits and to some extent through the selling of Accounts Receivables too. In case of Electronic Arts Inc, short term obligations form the bulk of the total liabilities, indicating the high dependence on short term financing (Electronic Arts Inc, 2012). In contrast to Electronic Arts, Activision Blizzard uses relatively less short term obligations in terms of relative percentages (Activision Blizzard Inc, 2012) 2. Activision Blizzard Inc. Liquidity Ratios 1. Current Ratio = Current Assets / Current Liabilities (2011) = 5,385,000,000 / 2,907,000,000 =1.85 x 2. Quick / Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities (2011) = (5,385,000,000 – 112,000,000)/ 2,907,000,000 =1.81 x Efficiency Ratios 3. Debtor Days = Account Receivables / (Sales/360) (2011) = 1,280,000,000 / (4,447,000,000/360) =103.62days 4. Creditor Days = Accounts Payable / (Sales/360) (2011) = (1,181,000,000) / (4,447,000,000/360) =95.61 days 5. Stock Turnover Days = (Inventory x 360) / Cost of Goods Sold (2011) = (112,000,000 x 360) / 2,126,000,000 =18.96 days Electronic Arts Inc Liquidity Ratios 6. Current Ratio = Current Assets / Current Liabilities (2011) = 3,032,000,000 / 2,001,000,000 =1.52 x 7. Quick / Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities (2011) = (3,032,000,000 –77,000,000) / 2,001,000,000 =1.48 x Efficiency Ratios 8. Debtor Days = Account Receivables / (Sales/360) (2011) = 391,000,000 / (3,589,000,000/360) =39.22 days 9. Creditor Days = Accounts Payable / (Sales/360) (2011) = (996,000,000)/ (3,589,000,000/360) =99.91 days 10. Stock Turnover Days = (Average Inventory x 360) / Cost of Goods Sold (2011) = (77,000,000 x 360)/ 1,499,000,000 =18.49 days 3. Activision Blizzard’s current ratio is greater in contrast to that of Electronic Arts Inc. It suggests that Activision is covering its short term obligations with its current assets in better manner. This suggests that in case of any possible emergency in future, Activision will stand a better chance of overcoming it because of its higher current ratio whereas Electronic Arts would comparatively find it difficult. In this manner, Activision’ ...Show more

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Financing the Short term Obligations University Introduction The purpose of this report is to evaluate the financing of short term debts and obligations. The report has been divided into two parts. In the first part, sources of short term finance for businesses’ have been described…
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