Analysis of Financial Scenario - Balance Sheet

 

Analysis of Financial Scenario

---

(a) Prepare the Balance Sheet and Analyze Net Assets, Liquidity, and Solvency

Given Data:

• Fixed Assets:

  • Building: £1,340k
  • Plant and Machinery: £223k
  • Investment: $10\% \times £1,200k = £120k$
  • Total Fixed Assets: £1,683k

• Current Assets:

  • Cash at Bank: £4k
  • Debtors: £620k
  • Stock: £780k
  • WIP (40% of £670k): $0.4 \times £670k = £268k$
  • Total Current Assets: £1,672k

• Current Liabilities:

  • Creditors: £467k
  • Customer Deposit: £150k
  • Bank Overdraft: £785k
  • Total Current Liabilities: £1,402k

• Long-Term Liabilities:

  • Bank Loan: £200k
  • Provision for Warranty: £50k
  • Total Long-Term Liabilities: £250k

Calculations:

• Net Assets:

$$\text{Net Assets} = (\text{Fixed Assets} + \text{Current Assets}) - (\text{Current Liabilities} + \text{Long-Term Liabilities})$$ $$\text{Net Assets} = (1,683k + 1,672k) - (1,402k + 250k) = £1,703k$$

• Liquidity:

$$\text{Liquidity} = \text{Current Assets} - \text{Current Liabilities}$$ $$\text{Liquidity} = 1,672k - 1,402k = £270k$$

Commentary:

• Liquidity: Positive liquidity (£270k) indicates the company can cover its short-term liabilities using its current assets.
• Solvency: Positive net assets (£1,703k) show the company is solvent and can continue trading. The business has a stable financial foundation.

---

(b) Issuance of 1,000k Shares

• Share Issuance: 1,000k shares sold at £1 each.
• Impact on Net Assets:
  Net assets remain unchanged, but the financing structure changes.
  • Total Net Assets: £1,703k
  • Share Capital: £1,000k
  • Accumulated Profit and Loss:

$$\text{Accumulated Profit and Loss} = \text{Net Assets} - \text{Share Capital}$$ $$\text{Accumulated Profit and Loss} = 1,703k - 1,000k = £703k$$

---

(c) Acquisition of 90% Stake in the Business

• Acquisition Details:

  • Company currently holds a 10% stake (valued at £1.2 million).
  • Purchases 90% stake valued at £2.1 million.
  • Payment:
    • 50% financed through a long-term bank loan: $0.5 \times £2,100k = £1,050k$.
    • 50% financed by issuing shares at £1 each: £1,050k.

• Revised Balance Sheet:

  Fixed Assets:

  • Original Fixed Assets: £1,683k
  • Acquired Business Value: $90\% \times £2,100k + 10\% \times £1,200k = £1,890k + £120k = £2,010k$
  • Total Fixed Assets: $1,683k + 2,010k = £3,573k$

  Current Assets:

  • Unchanged at £1,672k.

  Current Liabilities:

  • Unchanged at £1,402k.

  Long-Term Liabilities:

  • New Bank Loan: £1,050k.
  • Original Bank Loan: £200k.
  • Provision for Warranty: £50k.
  • Total Long-Term Liabilities: $1,050k + 200k + 50k = £1,300k$

  Net Assets:

$$\text{Net Assets} = (\text{Fixed Assets} + \text{Current Assets}) - (\text{Current Liabilities} + \text{Long-Term Liabilities})$$ $$\text{Net Assets} = (3,573k + 1,672k) - (1,402k + 1,300k) = £2,543k$$

Liquidity:

$$\text{Liquidity} = \text{Current Assets} - \text{Current Liabilities}$$ $$\text{Liquidity} = 1,672k - 1,402k = £270k$$

Shareholders’ Equity:

• Original Share Capital: £1,000k.
• New Share Issuance: £1,050k.
• Accumulated Profit and Loss: £703k.
• Total Shareholders’ Equity:

$$\text{Total Equity} = 1,000k + 1,050k + 703k = £2,753k$$

---

Commentary on the Acquisition and Financial Position:

• Liquidity: Remains positive at £270k, indicating the company can still meet short-term obligations.
• Solvency: Net assets improve significantly to £2,543k, demonstrating strong solvency after the acquisition.
• Financing Structure: The issuance of shares and reliance on a long-term loan are balanced approaches, ensuring the company does not overly burden itself with debt.

Pooja Mattapalli