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259 GORWA CO (DEC 08 – MODIFIED)
The following financial information related to Gorwa Co:
20X7 20X6
$000 $000
Sales (all on credit) 37,400 26,720
Cost of sales 34,408 23,781
––––––– –––––––
Operating profit 2,992 2,939
Finance costs (interest payments) 355 274
––––––– –––––––
Profit before taxation 2,637 2,665
20X7 20X6
$000 $000 $000 $000
Non?current assets 13,632 12,750
Current assets
Inventory 4,600 2,400
Trade receivables 4,600 2,200
––––––– –––––––
9,200 4,600
Current liabilities
Trade payables 4,750 2,000
Overdraft 3,225 1,600
––––––– –––––––
7,975 3,600
Net current assets 1,225 1,000
––––––– –––––––
14,857 13,750
8% Bonds 2,425 2,425
––––––– –––––––
12,432 11,325
––––––– –––––––
Capital and reserves
Share capital 6,000 6,000
Reserves 6,432 5,325
––––––– –––––––
12,432 11,325
––––––– –––––––
The average variable overdraft interest rate in each year was 5%. The 8% bonds are
redeemable in ten years’ time.
Required:
(a) Discuss, with supporting calculations, the possible effects on Gorwa Co of an increase
in interest rates and advise the company of steps it can take to protect itself against
interest rate risk. ? (9 marks)
(b) Use the above financial information to discuss, with supporting calculations,
whether or not Gorwa Co is overtrading. ? (11 marks)There is no point in typing out a full question and expecting to be provided with a full answer. We are not a question answering service.
You must have an answer in the same book in which you found the question, so ask about whatever it is in the answer that you are not clear about and then I will explain.
Everything needed to be able to answer this question is covered in our free lectures. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
Hi sir,
I have one unclear point regarding this question. In the answer it shows all relevant figures and states that there is a sign of overtrading for part b. However, since the sales increased only by 40% while the inventory, receivables and payables rose by more than 100% percent, I thought that there is no overtrading, on the contrary, it is the signs of overcapitilazation. Thus, can you please help me understand why we should see these increases as a sign of overtrading.
Thank you in advance for your help and answer.
Rapid Increase in Sales: A significant and rapid growth in revenue.
Liquidity Problems: An increasing overdraft or cash flow issues.
Higher Receivables and Inventory Days: Difficulty in collecting receivables and managing inventory efficiently.
Increase in Short-term Finance: A rise in short-term borrowing without a corresponding increase in long-term finance.
Increased Payables Days: Delays in paying suppliers due to cash shortages.
Reducing Current Ratio: A decline in the current ratio, indicating potential liquidity problems.So a lack of cashflow.
Persistent use of a bank overdraft facility – or excessive borrowing.
High revenue growth but low gross and operating profit margin but it doesn’t have to be a ridiculously high increase
Signs of working capital increases
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