Question

Hi, I have a question. I am doing Preminary Analytical Procedure for Apollo Shoes.
I found unusual percentage for Line of Credit( increased to 344%) and Accounts Payable
decreased by 59%. Is this cause RMM increase? I have hard time understanding this project.
Please help me. Thanks.

Answer 1

Hi, it is critical to see the absolute numbers in this case. For example, if line of credit was 100 in previous year, with an increase of 344%, the additional line of credit liability will be 444, i.e. an increase of 344.

If the accounts payable was around 700 in the previous year and come down to around 330 or 350 in the current year, this can very clearly mean that the company has taken additional LC and reduced its accounts payable as there is an indication that the amount of liabilities largely offset each other. The point to then be investigated then is why does the company need LC (on which it pays interest) to reduce its accoutns payable. Possible reasons could be revised credit terms with suppliers or no timely recoveries from customers, which may have led the company to borrow to pay its suppliers

If the amounts are not more or less offset in absolute terms, then it needs a deeper investigation on whare the funds were actually used. This may need a scrutiny of the entire balance sheet , previous year comparatives (possibly, the previous year had an unusual payable for a capital expenditure which is not there in current year) cash in hand balance, trade receivables position, any capital expenditure during current or previous year. This will lead to a risk of material miistatement and therefore, deserves due scrutiny accordingly.

Please comment for any further clarifications