Accounting - Profit and Loss Statement

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Question:Accounting

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Accounting Assignment

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Question 12 a The Alternative sources of finance available and appropriate to finance the purchase of a new Van and a new Machine for the business are debt financing through external creditors, loan holders or mortgage holders. The purchase would be financed long term and the loan would carry interest and would also be bound by a security which may be fixed or a floating charge, redeemable at maturity. Retained earnings from previous years of $ 2,900 as indicated by the balance sheet of the company could also be used for financing with the advantage of nil issue costs and non-dilution of ownership control. Lease financing through Operating or Financing leases or Hire purchase agreements are also an option wherein the owner would allow the business to use the asset, for a specified time and payment. Under Hire purchase, the business would have the added benefit of purchasing the asset on payment of the final instalment. Cash grants and similar types of government assistance, are available for purchasing assets by business belonging to certain industries and areas. This source of finance could also be availed if applicable. ("Chapter 7 - Sources of finance", 2016) b The Bank Manager was not prepared to lend an unsecured loan as Bank borrowings are bound by legal implications and bankers sanction loans on the rule of PARTS. The balance sheet indicates that the business in highly financed through debt compared to equity. This is not a preferred financial structure for the lending bank who might not want to risk its principal and the interest income. The debt – equity ratio as computed on the basis of the balance sheet would be 88 % (56200/63800) in this case. Moreover, in case of bankruptcy, bank borrowings rank after payments have been made to government and financial institutions. The Creditworthiness of the borrower which usually forms the basis of unsecured loans is also not proved in this case, in case the bank is ready to grant the unsecured loan as indicated by the balance sheet. Assuming that the purchase of the new van and equipment was such that the amount of covered security would in any case have been inadequate to cover the costs, the bank manager refused to grant the loan. The Collateral as security may prove inadequate to the banker. ("Personal Finance Articles", 2016) -Purpose -Amount -Repayment -Term - Security

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