ACCA FM Syllabus C. Working Capital Management - Overtrading - Past Papers ^{2 / 2}

June 2016 ^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:

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

Assume there are 360 days in each year.

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)

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June 2012

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Question 2a

The following financial information relates to Wobnig Co.

Income statement extracts

	2011	2010
	$000	$000
revenue	14525	10375
cost of sales	10458	6640
	-------	-------
profit before interest and tax	4067	3735
interest	355	292
	-------	-------
profit before tax	3712	3443
taxation	1485	1278
	-------	-------
distribution profit	2227	2165
	-------	-------

statement of financial position extract
	2011	2011	2012	2012
	$000	$000	$000	$000
non-current assets		15284		14602
current assets
inventory	2149		1092
trade receivables	3200		1734
	------		------
		5349		2826
		------		------
total assets		20633		17428
		------		------

current liabilities
trade payables	2865		1637
overdraft	1500		250
	------		------
		4365		1887
equity
ordinary shares	8000		8000
reserves	4268		3541
	------		------
		12268		11541
long term liabilities
7% bonds		4000		4000
		------		------
total liabilities		20633		17428

Average ratios for the last two years for companies with similar business operations to Wobnig Co are as follows:

Current ratio 1·7 times
Quick ratio 1·1 times
Inventory days 55 days
Trade receivables days 60 days
Trade payables days 85 days
Sales revenue/net working capital 10 times

Required:

Using suitable working capital ratios and analysis of the financial information provided, evaluate whether Wobnig Co can be described as overtrading (undercapitalised).

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