This question asked whether a company (Wobnig Co) was overtrading and a good place to start an answer would be to state what overtrading was and how it could be recognised. This would then provide a basis for financial analysis of the information provided and a discussion of the findings. Most answer to this question gained good marks.

Answers that did not focus on the question asked, which was whether or not the company was overtrading, lost marks as a result. For example, some answer discussed, often in detail, how the company could improve its working capital position. These answers were wasting time, because this was not the question that was asked.

So discussing the possibility of offering discounts for early settlement, the loss of goodwill from trade suppliers, and the need to look for obsolete stock was a waste of time and not the way to gain marks in this question.

The question provided a list of average ratios for companies similar to Wobnig Co. Most answers calculated these ratios for each of the two years of financial statement data provided by the question, using the average ratios for similar companies to assist in commenting on the trend showed by Wobnig’s ratios.

Since overtrading (undercapitalisation) refers to an increased level of business activity that is supported by too small a capital base, answers needed to look at how long-term finance had not kept pace with the increased need for finance, leading to increased reliance on short-term finance such as an overdraft or trade credit. This and other signs of overtrading are discussed in detail in the suggested answer.