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ould accept the factoring service offered by Powell. What use should the company make of any finance provided by

ould accept the factoring service offered by Powell. What use should the company make of any finance provided by

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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(b). Using the information given, assess whether Rowett should accept the factoring service offered
by Powell. What use should the company make of any finance provided by the factor?

Question 1 The following has been extracted from the financial statements of Rowett: Statement of profit or loss extracts £000 £000 Revenue 12,000 Cost of sales: Raw materials 5,800 Labour 3,060 8,860 Gross profit 3,140 Administration/distribution 1,680 Profit before interest and tax 1,460 Financial position statement extracts £000 £000 Current assets: Inventory of raw materials 1,634 Inventories of finished goods 2,018 Trade receivables 1,538 Cash and bank 500 5,690 Current liabilities: Trade payables 1,092 Overdraft 300 Other expenses 76 1,468 Powell, a factoring company, has offered to take over Rowett's debt administration and credit control on a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett £160,000 per year in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell would reduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at an interest rate of 10 per cent. Rowett finances working capital from an overdraft at 8 per cent.
Transcribed Image Text:Question 1 The following has been extracted from the financial statements of Rowett: Statement of profit or loss extracts £000 £000 Revenue 12,000 Cost of sales: Raw materials 5,800 Labour 3,060 8,860 Gross profit 3,140 Administration/distribution 1,680 Profit before interest and tax 1,460 Financial position statement extracts £000 £000 Current assets: Inventory of raw materials 1,634 Inventories of finished goods 2,018 Trade receivables 1,538 Cash and bank 500 5,690 Current liabilities: Trade payables 1,092 Overdraft 300 Other expenses 76 1,468 Powell, a factoring company, has offered to take over Rowett's debt administration and credit control on a non-recourse basis for an annual fee of 2 per cent of sales. This would save Rowett £160,000 per year in administration costs and reduce bad debts from 0.5 per cent of sales to nil. Powell would reduce trade receivables days to 40 days and would advance 75 per cent of invoiced debts at an interest rate of 10 per cent. Rowett finances working capital from an overdraft at 8 per cent.
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