Eric Ltd is a Singapore-based company that has approached a local
bank in Australia for a finance facility of $1,200,000 to service its daily operations. The Australian bank traditionally uses the 'operations index' ratio to assess the ability of companies to be efficient at generating cash from their day-to-day profits. The ratio is expressed as:
______Cash flows from operating activities______
Profit from ordinary activities after income tax
The Australian bank uses 1.5 (minimum) as the benchmark ratio when granting loan facilities to any business, 'based on normalised cash flow'. The current profit after tax reported for the year is $850,000. And the net operating cash flows for the year were $1,300,000 The local bank uses Australian accounting standards as a basis for lending decisions. You, as an auditor for the company, have noted the following policy differences between the accounts which have been prepared based on generally accepted accounting policy in Singapore and what is usually required for Australian accounting standards (IFRS equivalent).
-Interest received $320,000 have been traditionally classified as financing activities in prior years, but as operating activities in the current year. No justification has been made for any policy change.
-$150,000 of interest paid (included in borrowing costs), which have been classified as a financing activity, relate to costs associated with the construction of a non-current asset (qualifying asset).
-The company has expensed $125,000 of software development costs that, upon inspection, should have been capitalised as the software project satisfies the capitalisation requirements of IFRS.Required:
Based on the above information, would the organisation be granted the $1,200,000 loan from the bank using Australian Accounting Standards? Show all your workings. (Round off your answers to the nearest two decimals).
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