Sample
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Question 1
Crago Co is concerned that it may be overtrading. Financial information relating to the company is as follows.
| 20X5 | 20X4 | |||
|---|---|---|---|---|
| $000 | $000 | $000 | $000 | |
| Credit sales income | 17,100 | 12,000 | ||
| Cost of sales | 8,550 | 7,500 | ||
| Current assets | ||||
| Inventory | 2,500 | 2,100 | ||
| Trade receivables | 2,000 | 1,000 | ||
| Current liabilities | 4,500 | 3,100 | ||
| Trade payables | 1,900 | 1,250 | ||
| Overdraft | 2,400 | 850 | ||
| 4,300 | 2,100 | |||
| Net working capital | 200 | 1,000 | ||
| Long-term debt | 3,000 | 3,000 |
Companies which are similar to Crago Co have the following average values for 20X5:
Assume there are 360 days in each year.
| Inventory days | 65 days |
| Trade receivables days | 30 days |
| Trade payables days | 50 days |
| Current ratio | 1·7 times |
| Quick ratio | 0·8 times |
| 2,500 |
Required:
Evaluate whether Crago can be considered to be overtrading and discuss how overtrading can be overcome.
Note: Up to 4 marks are available for calculations. (10 marks)