- 15 Marks
FM – L2 – Q104 – Working Capital Management
Analyze Peak Enterprises Limited's financial statements to determine if it is overtrading and discuss its implications.
Question
Peak Enterprises Limited is a small manufacturing company. Its summarized accounts for the last two years are presented below:
Statements of Financial Position as at 31st March
| Year 5 (GH¢’000) | Year 6 (GH¢’000) | |
|---|---|---|
| Fixed Assets | 1,130 | 1,080 |
| Current Assets | ||
| Inventory | 210 | 260 |
| Trade Receivables | 120 | 160 |
| Cash | 30 | – |
| Total Current Assets | 360 | 420 |
| Total Assets | 1,490 | 1,500 |
| Equity and Liabilities | ||
| Equity Shares of GH¢0.25 | 200 | 200 |
| Accumulated Profits | 680 | 500 |
| Total Equity | 880 | 700 |
| Medium-Term Bank Loan | 200 | 150 |
| Current Liabilities | ||
| Bank Overdraft | 140 | 250 |
| Trade Payables | 200 | 280 |
| Other Payables | 70 | 120 |
| Total Current Liabilities | 410 | 650 |
| Total Equity and Liabilities | 1,490 | 1,500 |
Statements of Profit or Loss for the Year Ending 31st March
| Year 5 (GH¢’000) | Year 6 (GH¢’000) | |
|---|---|---|
| Sales | 1,800 | 2,900 |
| Gross Profit | 210 | 260 |
| Profit Before Tax | 120 | 160 |
| Taxation | (30) | (40) |
Required
(a) Comment on whether there is any evidence that Peak Enterprises Limited is overtrading.
(b) Discuss the implications of overtrading for Peak Enterprises Limited.
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