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I will be Thankful if you can please clear these doubt of mine 🙂
1) Could you please state whether the indicators of overtrading mentioned by the examiner in Gorwa Co (Dec 2008) and Wobnig Co (June 2012) are ALL the indicators of overtrading or maybe a few of them are as such indicate overtrading but not all.
Please clear that to me! Because I am doubtful whether the list of indicators in the examiner’s answer is ALL for overtrading or not.
2) These are the Overtrading factors stated below that I list them all to know whether they all are correct or not (please do tell me that :))
Overtrading is where the company has too much Sales Turnover because the company is expanding which is therefore indicated by the factors such as increase in the level of trade receivables, inventory payable & overdraft but less Cash.
Receivable days & Inventory days & Payable days all will increase indicating increase in Working Capital Cycle.
Non-Current Assets will increase but Non-Current Liabilities will remain static while Current Asset & Current Liabilities both will increase due to high Sales Turnover.
Working Capital will be LOW which is (CA – CL) but NET Sales Working Capital will increase w(hich indicates that how much $ of Sales is earned by Working Capital invested)
It is never possible to say for certain that a company is overtrading and there is no set list of things to look at.
All you can do (and all you are ever expected to do) is look at the information and state if anything appears to suggest that they might be overtrading.
The main indicators are:
A rapid increase in sales (you cannot say ‘too much’ because there is no cut-off as to what is ‘too much’).
Liquidity problems (an increasing overdraft).
Higher receivables and inventory days (because they are losing control of their receivables collecting etc..)
Too little long term finance raised to cover higher working capital (most of any new long-term finance having gone to finance new non-current assets).
Have you watched my free lectures on this where I explain the problems that can occur due to over-trading?
Which of the following may indicate overtrading?A.Significant new issues of long-term financeB.Rising profits but falling marginsC.Rising receivables turnoverD.Falling revenue
Why are you attempting a question for which you do not have an answer? You should be using a Revision Kit from one of the ACCA Approved Publishers – they have answers!!
Tell me what you think the answer is and I will then tell you whether you are correct or, if you are wrong then why.
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