Determine usefulness of information in financial statements, Finance Basics

Since 1968, Dracula Limited has traded in Doncaster, South Yorkshire as a manufacturer of fancy-dress and theatrical costumes. It produces a wide range of general theatrical costumes, but its fancy-dress costumes are more specialised in that it manufactures chiefly vampire and bat costumes. The firm employs a large number of local people in the Doncaster area, and sources most of its raw materials for costume manufacture from textile firms in the north of England. It sells its costumes to fancy-dress shops and theatres locally and in London, but also exports its fancy-dress costumes to the USA, especially the state of Louisiana. Its main business rival is Goth Limited, a firm of similar size, which operates in the south-east of England.

Dracula Limited's four directors, Mr Lugosi, Mr Lee, Mr Langella and Mr Oldman, own 80 per cent of the shares in equal proportions, with the remaining 20 per cent being owned in equal proportions by Mr Harker, Mr Blade, Mr Van Helsing, Ms Buffy and Mr Stoker.

In the current economic recession, the business has not been doing very well and has made a small loss for its two most recent accounting periods, with its US exports being affected more adversely than other sales. However, Mr Lugosi, the managing director, has managed to convince the company's bank that, based on the success of films such as the 'Batman' and 'Twilight' series and the television series 'True Blood', business is likely to get better, and that it is now a suitable time to expand the range of fancy-dress costumes that the company manufactures into wolf, maenad, elf and fairy costumes. The bank has therefore agreed to lend Dracula Limited £4 million, repayable in full in ten years' time at an annual interest rate of 5 per cent. This £4 million will be classed as a long-term loan, and the influx of this amount of cash will exactly double the value of the net assets and capital shown in the most recent balance sheet. The money will be used to buy additional machinery, hire additional staff and provide extra working capital. The company's factory premises in Doncaster have been used as security for the loan. The other three directors are very surprised that Mr Lugosi has been so successful in convincing the bank to make such a loan to the company, and are concerned as to how this might be viewed by the company's stakeholders. Word has spread very rapidly in the local business community of Mr Lugosi's success in obtaining the loan.

Dracula Limited makes its full, audited financial statements available for each accounting period on its website.

The company also regularly supplies local schools with costumes for school plays free of charge and makes substantial annual donations to a local charity dedicated to the preservation of a rare species of bat, which inhabits caves in woodlands a few miles distant from the company's factory premises.

(a) Assume that you are the financial accountant for Dracula Limited and prepare a report for the directors, identifying the stakeholders who would have an interest in the company's financial performance and explaining how their interests might be affected by the company acquiring the loan.

(b) (b) Explain, by reference to the qualitative characteristics that determine the usefulness of information in financial statements, how disclosing the loan in the financial statements of Dracula Ltd, where it will appear in the balance sheet as a long-term liability (that is, one that lasts for more than one year), fulfils the requirement for information to be useful.

Guidance notes for Question 1 Your answer to Question 1 should not exceed 2,000 words in total. This limit includes all material you wish to include in your answer, other than any list of references to academic material(s). The above mark allocation indicates how you should allocate your word count between the parts of the question.

Posted Date: 3/20/2013 3:01:23 AM | Location : United States







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