Question A:Is the company likely to be successful if it approaches its bank FCIB for a loan to undertake a project at a cost of $2.5 million? 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 capitalwas provided by each sister. However, the company has managed to return a profit in each year ofoperation as shown in the financial statements.ARG Inc. has an overdraft limit of $3.2 million and pays interest on its overdraft at a rate of 6 percent(6%) per year. The company currently has no long-term debt. Current liabilities consist of tradecreditors and overdraft finance in each of the three years as follows:YearOverdraft ($'000)Trade creditors ($'000)201720182019505671,1674007331,133Interest??The industry averages for firms similar to ARG Inc. areNetProfit 9%Creditor days70 daysMarginInterest cover15 timesCurrent ratio2.1 timesStock daysDebtor days85 daysQuick ratio0.8 times75 daysDEBT/Equity ratio40% (using Book value) ARG INCIncome Statement for the years ending December 31201920182017(S'000)(S'000)(S'000)Revenue5,20034002600Cost of Goods sold457028062104Profit before interest & tax630594496Interest70343Earnings before tax560560493Тах140140123Net Income420420370Dividends202020Retained profit400400350ARG IncBalance Sheet as at December 31201920182017(S'000)(S'000)(S'000)Fixed Assets1,6001,200800Current AssetsInventoryAccounts Receivable6001,4501,4001,0008504002,8501,8501,000Total Assets4,4503,0501,800Current Liabilities2,3001,300450Ordinary shares1,0001,0007501,000Reserves1,150350Total Liabilities & Owners Equity4,4503,0501,800

Answered: Question A: Is the company likely to…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Question A:

Is the company likely to be successful if it approaches its bank FCIB for a loan to undertake a project at a cost of $2.5 million?

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 $3.2 million and pays interest on its overdraft at a rate of 6 percent
(6%) per year. The company currently has no long-term debt. Current liabilities consist of trade
creditors and overdraft finance in each of the three years as follows:
Year
Overdraft ($'000)
Trade creditors ($'000)
2017
2018
2019
50
567
1,167
400
733
1,133
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
Debtor days
85 days
Quick ratio
0.8 times
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
2806
2104
Profit before interest & tax
630
594
496
Interest
70
34
3
Earnings before tax
560
560
493
Тах
140
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
600
1,450
1,400
1,000
850
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
750
1,000
Reserves
1,150
350
Total Liabilities & Owners Equity
4,450
3,050
1,800

Expert Solution

Step 1: Definition

Ratio analysis:

The analysis of a company using the financial ratios and comparing its trends and measure its performance within the company and the companies of the industry is known as ratio analysis. The main categories of ratio analyses are liquidity ratios, profitability ratios, activity ratios, and leverage ratios.

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