You have received the latest annual accounts of your customer Ray Ling Ltd, manufacturers of fencing materials. As part of your analysis, you are looking to review the performance of the business against 2 financial covenants which had been agreed for monitoring and control purposes. These covenants are:
· Net Worth – ‘The company is to maintain its tangible net worth at a minimum level of £60,000 from 31/07/13 and £70,000 from 31/07/14’.
· Debtors Covenant – ‘Trade Debtors must be maintained at a minimum level of 200% of overdraft borrowing at all times’.
The figures for the years 2013 and 2014 are as undernoted:-
BALANCE SHEET
2013 2014
£’s £’s
Fixed Assets
Land & Buildings 33,000 60,000
Motor Vehicles 18,000 12,000
Office Equipment 11,000 7,000
Investments 1,000
Total Fixed Assets 62,000 80,000
Goodwill 27,000 24,000
Current Assets
Stock 14,000 10,000
Trade Debtors 103,000 188,000
Intercompany Loans 0 28,000
Total Current Assets 117,000 226,000
Current Liabilities
Overdraft 50,000 91,000
Trade Creditors 35,000 75,000
Other Creditors 12,000 26,000
Total Current Liabilities 97,000 192,000
Bank Loan 22,000 20,000
Capital & Reserves
Share Capital 1,000 1,000
Profit & Loss A/c 86,000 90,000
Revaluation Reserve 27,000
NET WORTH 87,000 118,000
Turnover 650,000 660,000
Comment on performance against each of these covenants. This should include any issues or concerns that arise when reviewing the position in relation to the value and effectiveness of these particular covenants (14 marks)
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