Accounting Business Reporting for Decision Making

CHAPTER 13 Financing the business 555

Option Right to subscribe to shares at a price and time that are predetermined.

Ordinary shares The most commonly traded type of shares in Australia. Holders of ordinary shares

are part-owners of a company and may receive payments in cash (called dividends). This class of

shares has no preferential rights to dividends or capital on winding up.

Overdraft Loan facility attached to a current (cheque) account.

Permanent funding Funding with maturities greater than one year.

Portfolio investment Investment where the investor has no control over the key policies of the entity.

Preference shares Shares with characteristics of both debt and equity. They rank before ordinary

shares in the event of liquidation of the company and usually receive a fixed rate of return.

Renounceable rights issue Rights issue where shareholders are free to sell their rights to subscribe on

the market.

Rights issue Issue of new shares to existing shareholders.

Spontaneous sources of funding Sources of funding that arise in a substantially unplanned and

unstructured way in the ordinary course of business.

Temporary funding Short-term formal sources of finance.

Working capital Difference between current assets and current liabilities.

APPLY YOUR KNOWLEDGE 37 marks

PART A

a. Explain the advantages and disadvantages of using factoring or discounting. 4 marks

b. Discuss what type of businesses would benefit from floor-plan finance. 4 marks

c. Graham Ltd is a profitable manufacturing company in the clothing industry and

currently has a net working capital of 150 per cent. Cockcroft Ltd commenced operations

this year in the biotechnology industry and is currently trialling a new pharmaceutical

drug to cure cancer. Cockcroft Ltd’s net working capital is 15 per cent. Provide reasons

why these two entities could have vastly different net working capital and how both could

still be in existence in five years’ time. 4 marks

PART B

a. The following table illustrates key figures from Robertson Ltd’s statement of profit or loss and

balance sheet for the five-year period ending 30 June 2017.

Item 2013 2014 2015 2016 2017

Trade creditors 680 850 1 020 1 190 1 360

Credit purchases 3 400 3 740 4 080 4 250 2 312

Calculate the creditors turnover (in days) for Robertson Ltd for the years 2014 to 2017.

Describe the trend over the four-year period. Comment on the trend above if

Robertson Ltd’s average credit limit with its suppliers is 30 days. 9 marks

b. Robertson Ltd requires external finance to fund a new business venture which will be

developed over the next five years. The company is considering the options of an

instalment loan and an interest-only loan. Discuss the advantages and disadvantages

of both of these forms of finance. 6 marks

c. Robertson Ltd is also considering a 180-day commercial bill at 7 per cent yield including fees.

The face value of the commercial bill is $400 000. How much will Robertson Ltd receive? 5 marks

d. Robertson Ltd’s average collection period for its accounts receivable is 45 days. Its credit

terms are 30 days. What strategies can Robertson Ltd implement to reduce its collection

period to a period closer to its credit terms? 5 marks