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Recommend whether chandra overdraft facility should cancel
Course:- Project Management
Reference No.:- EM13885938




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ChandraBebby sets up Bendigo Fencing Company to manufacture, sell and install fencing material. He was an engineer by profession but he understood the importance of accounting information and kept his accounting records meticulously throughout the year. At the end of the year he prepared the following income statement for the year:

Bendigo Fencing Company
Income Statement
for the year ended 30 June, 2015

Sales

 

45,450

Less Operating expenses:

 

 

Purchase of Raw Material

$20,000

 

Purchase of factory supplies

1,000

 

Wages of the factory employees (who worked directly on the factory)

1,000

 

Wages for other factory employees

1,000

 

Painting department supervisor's salary

7,500

 

Painter

500

 

Managers' salary

       4,000

 

Office staff salaries

       1,000

 

Sales Staff salaries

       2,200

 

Advertising

       1,000

 

Administrative Expenses

800

 

Marketing and distribution costs

500

 

Sales commission

500

 

Rent

     2,500

 

Electricity

450

 

Purchase of factory equipment

   14,000

 

Purchase of Office Equipment

    1,000

 

Purchase of Sales vehicles

    1,500

 

Total Operating expenses

 

60450

Net Loss

 

$(15000)

Although disappointed, Chandra was not surprised. He knew that expenses were higher than sales because, throughout the year, he had been unable to generate a cash surplus. His bank overdraft had blown out and his bank manager has asked him to present his financial statements for 2015 to the bank.

Required:

You are asked to:

1. Review the performance of Bendigo Fencing Company in 2014 and make a recommendation as to whether Chandra's overdraft facility should be cancelled.

2. Prepare a report for Chandra explaining the errors he made in his income statement.

To perform this analysis you will need to recast Chandra's income statement. The following information may be useful:

• At 30 June 2015, the following inventories existed:

                        Raw Material                     $2,000

                        Work in Process                 $4,000

                        Finished Goods                  $5,150

• The factory occupies 70 per cent of the rented building, the sales area 25 per cent and the administration area 5 per cent.

• All the company's fixed assets are estimated to have a useful life for 7 years and no salvage value at the end of their life.

• Chandra spends 60 per cent of his time as factory manager and spends the remaining time equally on sales and general administration.

• Electricity costs are consumed 70% by the factory and 30% by the office.

Answered:-

Verified Expert


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It is recommended that the overdraft facility of Chandra’s should be continued. The reasons for this recommendation are as under-
• The business has generated the gross profit and the net profit during the year, hence it is suggested to continue with the credit facility of Chandra(Horgen, 2012). It may be noted that there is not information about the cash flow of the business, however it can be safely assumed that that the cash flow will be positive.
• The restated income statement has been provided as annexure 1.
• Various supporting calculations are provided in annexure 2.
If a business is running in profit then there is no reason to stop its credit facility except in rare cases.




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