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Q2(a)Gearing and finance
“..and if the overdraft has not been agreed with the bank, the company may be incurring additional penalties and charged ..”Does it mean that the company is currently overdrawn the amount agree with the bank therefore it will be subject to additional charge and penalty?
Q2(b)Audit evidence on the cash flow forecast
5th point : Does it not the comparing of the previous profit and other financial forecast and their outcome will able to assess the accuracy rather than consistency? why the answer stated for consistency of the cash flow forecast and other PFI?The scenario shows a bank overdraft balance $1.8 million. It’s highly unlikely that any business could go “into the red” by such an amount without agreement – so suppose the bank has agreed a facility of $1.5m. Now technically, the bank may be able to demand repayment if the company exceeds this – but in practice (since the company doesn’t have the means to repay – that’s why it’s in the red) the bank would rather not force company liquidation but instead charge additional interest or penalties.
Its referring to the need for consistency between the CFF and, for example, forecast profit. For example, cash receipts in the CFF should be consistent with revenue in forecast profit (allowing for collection period).
Refers to part (a) Why the company able to drawn the amount exceed the facility agreed with the bank? Does not the facility is the maximum amount that the company can be drawn?
A business should obviously try and keep within the facility but it may not be “physically” prevented from exceeding an agreed limit.
Suppose a limit is $1,000, the current overdraft balance is $900 and the business tries to make a payment (by banker’s draft or cheque) of $120. The bank may “stop” the payment going through (so the limit is not exceeded) or it may allow it, increasing the overdraft amount to $1,020. You should know from your financial management studies that this is an extremely expensive source of finance and financial managers should exercise better control over cash to avoid this.
refers to part (b) ,why refers to the previous profit forecast rather than current year to assess the consistency with cash flow forecast ?
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