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(i) What are the current financial position and the recent financial performance of this company? (ii) Should the company's bank provide it with the finance for a loan to undertake a project at a cost of $2.5 million and on what basis.

(i) What are the current financial position and the recent financial performance of this company? (ii) Should the company's bank provide it with the finance for a loan to undertake a project at a cost of $2.5 million and on what basis.

FINANCIAL ACCOUNTING
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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(i) What are the current financial position and the recent financial performance of this company?

(ii) Should the company's bank provide it with the finance for a loan to undertake a project at a cost of $2.5 million and on what basis.

ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements. ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: Year 2017 2018 2019 Overdraft ($'000) Trade creditors ($'000) 50 567 1,167 1,133 70,020 400 733 3,000 34,020 Interest The industry averages for firms similar to ARG Inc. are Net Profit 9% Creditor days 70 days Margin Interest cover 15 times Current ratio 2.1 times Stock days 85 days Quick ratio 0.8 times Debtor days 75 days DEBT/Equity ratio 40% (using Book value)
Transcribed Image Text:ARG Inc, is a manufacturer of dairy products that was formed three years ago by three sisters who, as directors, retain sole ownership of its ordinary share capital. One third of the initial share capital was provided by each sister. However, the company has managed to return a profit in each year of operation as shown in the financial statements. ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent (6%) per year. The company currently has no long-term debt. Current liabilities consist of trade creditors and overdraft finance in each of the three years as follows: Year 2017 2018 2019 Overdraft ($'000) Trade creditors ($'000) 50 567 1,167 1,133 70,020 400 733 3,000 34,020 Interest The industry averages for firms similar to ARG Inc. are Net Profit 9% Creditor days 70 days Margin Interest cover 15 times Current ratio 2.1 times Stock days 85 days Quick ratio 0.8 times Debtor days 75 days DEBT/Equity ratio 40% (using Book value)
ARG INC Income Statement for the years ending December 31 2019 2018 2017 (S'000) (S'000) (S'000) Revenue 5,200 3400 2600 Cost of Goods sold 4570 630 2806 2104 Profit before interest & tax 594 496 Interest 70 34 3 Earnings before tax 560 140 560 493 Тах 140 123 Net Income 420 420 370 Dividends 20 20 20 Retained profit 400 400 350 ARG Inc Balance Sheet as at December 31 2019 2018 2017 (S'000) (S'000) (S'000) Fixed Assets 1,600 1,200 800 Current Assets Inventory Accounts Receivable 1,450 1,000 850 600 1.400 400 2,850 1,850 1,000 Total Assets 4,450 3,050 1,800 Current Liabilities 2,300 1,300 450 Ordinary shares 1,000 1,000 1,000 Reserves 1,150 750 350 Total Liabilities & Owners Equity 4,450 3,050 1,800
Transcribed Image Text:ARG INC Income Statement for the years ending December 31 2019 2018 2017 (S'000) (S'000) (S'000) Revenue 5,200 3400 2600 Cost of Goods sold 4570 630 2806 2104 Profit before interest & tax 594 496 Interest 70 34 3 Earnings before tax 560 140 560 493 Тах 140 123 Net Income 420 420 370 Dividends 20 20 20 Retained profit 400 400 350 ARG Inc Balance Sheet as at December 31 2019 2018 2017 (S'000) (S'000) (S'000) Fixed Assets 1,600 1,200 800 Current Assets Inventory Accounts Receivable 1,450 1,000 850 600 1.400 400 2,850 1,850 1,000 Total Assets 4,450 3,050 1,800 Current Liabilities 2,300 1,300 450 Ordinary shares 1,000 1,000 1,000 Reserves 1,150 750 350 Total Liabilities & Owners Equity 4,450 3,050 1,800
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