Acme Inc. is a wholesaler and distributor of electricalcomponents. The most recent draft financial statements of thebusiness revealed the following:
Income Statement for the Year (in millions)
Sales revenue 14.2
Opening inventories 3.2
Purchases 8.4
Goods available for sale 11.6
Closing inventories (3.8)
Cost of goods sold (7.8)
Gross profit 6.4
Administration expenses (3.0)
Distribution expenses (2.1)
Operating profit 1.3
Finance costs (0.8)
Profit before taxation (0.5)
Tax (0.2)
Profit for the period 0.3
Statement of Financial Positions as at the End of the Year (inMillions)
ASSETS
Noncurrent Assets
Property, plant, and equipment
Land and buildings 4.0
Equipment 1.1
Motor vehicles 0.4
Current Assets 5.5
Inventories 3.8
Trade receivables 2.9
Cash at bank 0.2
Total Assets 12.4
EQUITY AND LIABILITIES
Equity
Share capital 2.1
Retained earning 1.6
Noncurrent Liabilities 3.7
Loan notes (secured on property) 3.9
Current Liabilities
Trade payables 2.2
Short-term borrowings 2.6
4.8
Total equity and liabilities 12.4
Additional information: Land and buildings are shown at theircurrent market value. Equipment and motor vehicles are shown attheir carrying amount (that is, cost less accumulateddepreciation). ï· No dividends have been paid to ordinaryshareholders for the past three years.
In recent months, suppliers (trade payables) have been pressingfor payment. The chief executive has, consequently, decided toreduce their level to an average of 40 days outstanding. To achievethis, she has decided to approach the bank with a view toincreasing the overdraft (the short-term borrowings consist of onlya bank overdraft). The business is currently paying 10 percent ayear interest on the overdraft.
Identify four sources of finance (internal or external, butexcluding a bank overdraft) that may be suitable to finance thereduction in trade payables, and state, with reasons, which ofthese you consider the most appropriate.
Based on the information given, complete the followingtasks:
Comment on the liquidity position of the business.
Calculate the amount of finance required to reduce tradepayables, from the level shown on the statement of financialposition, to an average of 40 days outstanding.
State, with reasons, how you consider the bank would react tothe proposal to grant an additional overdraft facility.
Acme Inc. is a wholesaler and distributor of electricalcomponents. The most recent draft financial statements of thebusiness revealed the following:
Income Statement for the Year (in millions)
Sales revenue 14.2
Opening inventories 3.2
Purchases 8.4
Goods available for sale 11.6
Closing inventories (3.8)
Cost of goods sold (7.8)
Gross profit 6.4
Administration expenses (3.0)
Distribution expenses (2.1)
Operating profit 1.3
Finance costs (0.8)
Profit before taxation (0.5)
Tax (0.2)
Profit for the period 0.3
Statement of Financial Positions as at the End of the Year (inMillions)
ASSETS
Noncurrent Assets
Property, plant, and equipment
Land and buildings 4.0
Equipment 1.1
Motor vehicles 0.4
Current Assets 5.5
Inventories 3.8
Trade receivables 2.9
Cash at bank 0.2
Total Assets 12.4
EQUITY AND LIABILITIES
Equity
Share capital 2.1
Retained earning 1.6
Noncurrent Liabilities 3.7
Loan notes (secured on property) 3.9
Current Liabilities
Trade payables 2.2
Short-term borrowings 2.6
4.8
Total equity and liabilities 12.4
Additional information: Land and buildings are shown at theircurrent market value. Equipment and motor vehicles are shown attheir carrying amount (that is, cost less accumulateddepreciation). ï· No dividends have been paid to ordinaryshareholders for the past three years.
In recent months, suppliers (trade payables) have been pressingfor payment. The chief executive has, consequently, decided toreduce their level to an average of 40 days outstanding. To achievethis, she has decided to approach the bank with a view toincreasing the overdraft (the short-term borrowings consist of onlya bank overdraft). The business is currently paying 10 percent ayear interest on the overdraft.
Identify four sources of finance (internal or external, butexcluding a bank overdraft) that may be suitable to finance thereduction in trade payables, and state, with reasons, which ofthese you consider the most appropriate.
Based on the information given, complete the followingtasks:
Comment on the liquidity position of the business.
Calculate the amount of finance required to reduce tradepayables, from the level shown on the statement of financialposition, to an average of 40 days outstanding.
State, with reasons, how you consider the bank would react tothe proposal to grant an additional overdraft facility.
