558 Accounting: Business Reporting for Decision Making
13.12 Summarise the advantages and disadvantages of owning ordinary shares in a company
compared with financing the company through a loan. LO6, 7
13.13 Distinguish between rights and options. LO7
Exercises
BASIC | MODERATE | CHALLENGING
13.14 LO5
Erin and Kate is a clothing store for teenagers. It is chronically short of cash, so arranges a
180-day bank-accepted commercial bill (BAB). According to the theory of management of
assets, what use should it put this money to?13.15 LO2, 5
How can a profitable fast-growing entity such as Erin and Kate be chronically short of cash?
13.16 LO2
Erin and Kate has on average $200 000 of employees’ pay, tax withheld and superannuation
contributions in its hands at all times. What use should it make of these funds?
13.17 LO2, 3, 5
Coconut Plantations Pty Ltd manufactures sustainable coconut-based products for sale to
wholesalers and retailers around Australia and New Zealand. Jo Geter, the manager, has a goal
of increasing the market share of the company. Strategies to achieve this goal were increasing
marketing and promotional activities and offering attractive credit terms to new customers. The
implementation of both strategies was successful. Coconut Plantations has recently enjoyed an
upsurge in sales and its accounts receivable balances have increased dramatically. The company
now needs to increase its regular orders for raw materials. Jo is concerned that the company will
not have sufficient cash available to pay the resultant supplier invoices when they fall due. What
is your advice to Coconut Plantations regarding the financing of the supplier invoices?
13.18 LO2
‘Entities must juggle the costs of holding cash with the costs of not having enough.’ Explain the
issues involved.
13.19 LO3
Explain, with numerical examples, four aspects of an entity’s credit policies and how decisions
regarding each impact on the value of accounts receivable at any time.
13.20 LO3
After thinking about how it could be done, explain the processes an entity might use to collect its debts.
13.21 LO4
Give examples of inventories of retail products that would incur high costs for each of the following:
a. Storage and display b. Insurance c. Deterioration or obsolescence d. Theft.
13.22 LO5
Before reforms were put in place during the 1980s, many entities allowed their overdraft accounts
to remain continually overdrawn. Banks reformed the situation by advising these clients to
contract for longer-term funding. Provide an example of a company’s circumstances that would
necessitate entering into an overdraft arrangement with a bank.
13.23 LO6
Explain the advantages to all parties of a novated lease.
Problems
BASIC | MODERATE | CHALLENGING
13.24 Managing accounts receivable LO3
Coconut Plantations Pty Ltd manufactures sustainable coconut-based products for sale to whole-
salers and retailers around Australia and New Zealand. Jo Geter, the manager, has a goal of