ABSTRACT
To show how much difference it can make, let us reconsider the various ratios for Precision Locks Limited on the new assumption that the current liabilities of £250 000 include £100 000 of short-term bank overdraft. (We assume, however, that interest expense already included bank overdraft interest of £12 000.)
The table below summarizes the accounts, treating the bank overdraft as a current liability (left) and as semi-permanent long-term financing (right). We show selected ratios in each case, with an asterisk against the treatment we prefer. We would treat short-term borrowings as part of ‘capital employed’ – by excluding them from current liabilities. Thus we would take Precision Locks Limited’s ‘net assets’ as £650 000.
