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Comments based on FPIs

You are employed in the small business section of a medium-sized bank. Some time ago the bank
provided a local manufacturing company, F, with an overdraft facility of $3,000,000. This limit was
reached on 30 September 20X4 but was increased then to $5,000,000.
Your section head has just received the half-yearly financial statements of F for the period to 30
September 20X5. Having read these statements, your section head is extremely concerned as to the
performance of the company over the last year and is considering recommending the termination of the
overdraft facility. Before making any further decision, your section head wishes to have a second opinion.
Accordingly, he leaves a file of information concerning F on your desk and requires a report
recommending the best course of action. Information contained in the file:
Item 1: Income statements:
Six months to
Six months to
30 September 20X5
31 March 20X5
$000
$000
Sales
Cost of sales

10,000
-5,000

11,000
-5,500

Gross profit
Other operating expenses

5,000
-5,000

5,500
-4,500

Operating profit
Interest payable

0
-1,000

1,000
-900

Profit/(loss) before tax


Tax estimate

-1,000
0

100
-

Profit/(loss) after tax

-1,000

100

Item 2: Balance sheets at 30 September:


20X5
$000

20X5
$000

$000

$000

Non-current assets:
property
plant

5,000
3,500

8,500

5,200
3,000

Current assets:
inventories
receivables
cash in hand

3,000
5,000
80

2,600
4,600
80

8,080

7,280

2,600
5,000

2,600
3,000

7,600

5,600

Current liabilities:
trade payables
bank overdraft

8,200

NCAs
12% loan notes
(secured against the property)

Share capital ($1 shares)


Retained earnings

480

1,680

-4,800

-4,800

4,180

5,080

4,000
180

4,000
1,080

4,180

5,080

Item 3: Estimated realizable values of the assets of F at 30 September 20X5, based on a forced sale
scenario:
$000
Property
Plant
Inventories
Receivables

5,000
1,000
800
2,500
9,300

Required:
a. Using the items contained in the file, write a report to your section head which contains an
appraisal of the performance and financial position of F and considers the implications for the
bank of calling in the overdraft.
b. Produce a short appendix to the report you have compiled in (a). This should summarize the
limitations of the information available to you as a basis for making a recommendation as to the
wisdom or otherwise of calling in the overdraft.

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