Gainsborough Fashions Ltd operates a chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers’ demands. The most recent financial statements of the business are as follows:Notes:1The loan notes are secured by personal guarantees from the directors.2The current overdraft bears an interest rate of 12 per cent a year.Required:(a)Identify and discuss the major factors that a bank would take into account before deciding whether or not to grant an increase in the overdraft of a business.(b)State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary. Statement of financial position as at 31 May£mASSETSNon-current assetsProperty, plant and equipment at cost less depreciationFixtures and fittings67.0Motor vehicles7.074.0Current assetsInventories198.0Trade receivables3.0201.0Total assets275.0EQUITY AND LIABILITIESEquity£1 ordinary shares20.0General reserve4.0Retained earnings17.041.0Non-current liabilitiesBorrowings – loan notes repayable in just over one year's time40.0Current liabilitiesTrade payablesAccrued expenses162.010.0Borrowings – bank overdraft17.0Tax due5.0194.0Total equity and liabilities275.0 Abbreviated income statement for the year ended 31 May£mSales revenue740.0Operating profit38.0Interest charges(5.0)Profit before taxation33.0Tax(10.0)Profit for the year23.0A dividend of £23 million for the year was made.

The question is based on the concept of Accounting theory.

Answered: Gainsborough Fashions Ltd operates a…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Gainsborough Fashions Ltd operates a chain of fashion shops. In recent months the business has been under pressure from its suppliers to reduce the average credit period taken from three months to one month. As a result, the directors have approached the bank to ask for an increase in the existing overdraft for one year to be able to comply with the suppliers’ demands. The most recent financial statements of the business are as follows:

Notes:

1The loan notes are secured by personal guarantees from the directors.
2The current overdraft bears an interest rate of 12 per cent a year.

Required:

(a)Identify and discuss the major factors that a bank would take into account before deciding whether or not to grant an increase in the overdraft of a business.
(b)State whether, in your opinion, the bank should grant the required increase in the overdraft for Gainsborough Fashions Ltd. You should provide reasoned arguments and supporting calculations where necessary.

Statement of financial position as at 31 May
£m
ASSETS
Non-current assets
Property, plant and equipment at cost less depreciation
Fixtures and fittings
67.0
Motor vehicles
7.0
74.0
Current assets
Inventories
198.0
Trade receivables
3.0
201.0
Total assets
275.0
EQUITY AND LIABILITIES
Equity
£1 ordinary shares
20.0
General reserve
4.0
Retained earnings
17.0
41.0
Non-current liabilities
Borrowings – loan notes repayable in just over one year's time
40.0
Current liabilities
Trade payables
Accrued expenses
162.0
10.0
Borrowings – bank overdraft
17.0
Tax due
5.0
194.0
Total equity and liabilities
275.0

Abbreviated income statement for the year ended 31 May
£m
Sales revenue
740.0
Operating profit
38.0
Interest charges
(5.0)
Profit before taxation
33.0
Tax
(10.0)
Profit for the year
23.0
A dividend of £23 million for the year was made.

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