The chairman of a family business has been examining the following summary of the accounts of the company since it began three years ago.

The company’s products are popular in the locality and in the first two years sales could have been higher if there had been extra machine capacity available.
On 1 January 2016, additional share and loan capital was obtained which enabled extra machinery to be purchased. This gave an immediate increase in sales and profits.
Although 2015/16 showed the best yet results, the chairman is not very happy; the accountant has suggested that a dividend should not be proposed this year (2016) because of the overdraft. The accountant has proposed, however, that the directors consider a dividend of £14,000 (£2,000 up on last year).
Naturally, the chairman is displeased and wants some explanations from the accountant regarding the figures in the accounts. He specifically asks:
(i) Why, if profits are the best ever and considering the company has obtained extra capital during the year, has the company gone into overdraft? Can there really be a profit if there is no cash left in the bank to pay a dividend next year?
(ii) Why is the freehold still valued at the same price as in 2014? The real value seems to be about
£225,000. Why is this real value not in the statement of financial position?

Required:
Write a report to the chairman:
(a) Commenting on the state and progress of the business as disclosed by the accounts and the above information, supporting your analysis by appropriate key accounting ratios; and
(b) Giving reasoned answers, in the context of recognised accounting law, rules and practices, to each of the questions raised by the chairman.

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Freehold land and buildings Plant Less Depreciation Statement of Financial Position (at 30 June) £000 2014 2015 Actual Actual Inventory: goods and work in progress Accounts receivable Bank and cash Accounts payable Taxation Overdraft Loan Deferred tax Net assets Ordinary share capital (£1 shares) General reserve 150 (15) 20 33 10 20 4 = 150 135 285 63 348 24 (31) 317 300 17 317 150 (30) 45 101 15 80 17 1 G 150 120 270 161 431 97 (106) 325 300 25 325 2016 Actual 450 (75) 85 124 == 35 6 25 200 23 150 375 525 209 734 66 223 (289 445 400 45 445