Summarised below are the accounts for two comparable companies, Jayne
Ltd., and Delia Ltd. For the year ending 31 December 19x3.
Jayne Ltd
Delia Ltd
Profit & Loss Accounts
£
£
£
£
Sales
900,000
500,000
Less Cost of Sales
Opening Stock
36,000
25,000
Purchases
808,000
345,000
844,000
370,000
Closing Stock
44,000
25,000
800,000
345,000
Gross Profit
100,000
155,000
Less Expenses
40,000
55,000
Net Profit
60,000
100,000
======
======
Balance Sheets
Fixed Assets
500,000
400,000
Current Assets
Stock
44,000
25,000
Debtors
120,000
100,000
Bank
36,000
10,000
200,000
135,000
Less Current Liabilities
Creditors
100,000
135,000
100,000
0
600,000
400,000
======
======
Financed by:
Share Capital : £1 ordinary shares
400,000
300,000
Reserves
100,000
100,000
6% Debentures
100,000
600,000
400,000
answers to testing your understanding -
9
Jayne
Delia
(£000)
(£000)
(a) 60 x 100% = 10% 100
x 100% = 25%
600
400
(b) 60 x 100% = 6.7% 100 x
100% = 20%
900
500
(c) 900 = 1.5 times
500 = 1.25 times
600
400
(d) 800 = 20
345 = 13.8
40
25
(e) 200 : 100 = 2 : 1 135 : 135 = 1 : 1
(f) 100 = 16.7%
0%
600
Overtrading
Overtrading is one of the main causes of business failure. Its causes are many, and often complex, but for now we can say that overtrading's main cause is an incorrect balance between the amount of working capital available to a business, and the needs of the business. Overtrading sometimes comes about by a business increasing its sales too quickly .As a result there are many more debtors (customers having chosen not to pay cash but have promised to pay up later ) and the business may not have sufficient liquid funds available to pay its day to day expenses until the increased cash flows arrive from the increased turnover.
This time lag is caused by the cycle of manufacture - selling - receipt of payment. Until payment for the increased sales is received the business has still to pay for such items as purchases and wages, and needs money to do so. If debtors are slow to pay, the business can run out of working capital.
Gearing
Owners of a limited company are called ordinary shareholders or
"equity".
They are entitled to profits left over after payments have been
made to loan providers (debt or debentures).
Gearing is the relationship between equity capital [share capital]
and long term debt [e.g. debentures]. If a business has high long
term debt in proportion to equity, then it may have difficulty in paying
interest on its debt. This usually happens at times of high interest
rates, or when the business is going through a period of lower profits
than is usual. It happens because interest must be paid on long term
loans whether or not profits have been made.
The higher the gearing the riskier the situation is for owners because
owners get paid after loan interest is paid to the debenture holders
back to the question
try another one?