Question: Gainsborough Fashions Ltd operates a small chain of fashion shops in North Wales. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers' demands. The most recent financial statements of the business are as follows:
Balance sheet as at 31 May
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Non-current assets
Property, plant and equipment
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|
|
|
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Fixtures and fittings at cost
|
|
90.000
|
|
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Less Accumulated depreciation
|
|
23,000
|
67,000
|
|
Motor vehicles at cost
|
|
34.000
|
|
|
Less Accumulated depreciation
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|
27,000
|
7,000
|
|
|
|
|
74.000
|
|
Current assets
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|
|
|
|
Inventories at cost
|
|
198,000
|
|
|
Trade receivables
|
|
3,000
|
|
|
|
|
201,000
|
|
|
Current liabilities
|
|
|
|
|
Trade payables
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(162,000)
|
|
|
|
Accrued expenses
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(10,000)
|
|
|
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Bank overdraft
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(17.000)
|
|
|
|
Taxation
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(5,000)
|
|
|
|
|
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(194.000)
|
7,000
|
|
|
|
|
81,000
|
|
Non-current liabilities
Debentures repayable in just over one
|
|
|
year's time
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(40,000)
|
|
|
41,000
|
|
Equity
|
|
|
£1 ordinary shares
|
20,000
|
|
General reserve
|
4,000
|
|
Retained profit
|
17,000
|
|
|
41,000
|
Abbreviated income statement for the year ended 31 May
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Sales revenue
|
740,000
|
|
Net profit before interest and taxation
|
38,000
(5,
|
|
Interest charges
|
|
|
Net profit before taxation
|
33,000
|
|
Taxation
|
(10,000)
|
|
Net profit after taxation
|
23,000
|
|
Dividend paid
|
(10,000)
|
|
Retained profit for the year
|
13.000
|
Notes :
1. The debentures are secured by personal guarantees from the directors.
2. The current overdraft bears an interest rate of 12 per cent a year.
Required:
(a) Identify and discuss the major factors that a bank would take into account before deciding whether or not to grant an increase in the overdraft of a business.
(b) State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary.