Genesis Ltd. was incorporated in 2007 and has grown rapidly over the past three years. The rapid rate of growth has created problems for the business that management has found difficult to deal with. Recently, a firm of management consultants has been asked to help the company overcome these problems.
In a preliminary report to management, the management consultant's state: "Most of the difficulties faced by the business are symptoms of an underlying problem of overtrading." The most recent financial statements of the business are set out below.
Genesis Ltd.
Balance Sheet
as at October 31, 2010
(in $ thousands)

Required:
(a) Explain the term overtrading and state how overtrading might arise for a business.
(b) Discuss the kinds of problems that overtrading can create for a business.
(c) Calculate and discuss five financial ratios that might be used to establish whether or not the business is experiencing overtrading.
(d) State the ways in which a business may overcome the problem of overtrading.

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Current assets Accounts receivable Inventory Total current assets 104 128 232 Property, plant, and equipment Land Buildings Less: Accumulated depreciation Plant and equipment Less: Accumulated depreciation Trucks Less: Accumulated depreciation Total property plant, and equipment Total assets Current liabilities Bank overdraft Accounts payable Income taxes payable Total current liabilities Long-term liabilities Bonds payable (10%, secured) Total liabilities Shareholders' equity Common shares Retained earnings Total shareholders equity Total liabilities and shareholders' equity 200 330 88 242 168 52 116 118 54 64 622 854 358 184 550 120 670 60 124 184 854 Genesis Ltd. Income Statement for the year ended October 31, 2010 (in $ thousands) Sales Less: Opening inventory Plus: Purchases Goods available for sale Less: Closing inventory Cost of goods sold Gross profit Less: Selling and distribution expenses Administration expenses Interest expenses Earnings before taxes Less: Income tax expense Net income 1,640 116 1,260 1,376 128 1.248 392 204 92 340 52 16 36 Genesis Ltd. Statement of Retained Earnings for the year ended October 31, 2010 (in $ thousands) Opening retained earnings, November 1 Add: Net income Less: Dividends paid Closing retained earnings, October 31 92 36 124