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

Statement of Financial Position (at $\mathbf{3 0}$ June) $\mathbf{£ 0 0 0}$

\begin{tabular}{|c|c|c|c|c|c|c|}

\hline \multirow{5}{*}{\begin{tabular}{l}

Freehold land and buildings \\

Plant \\

Less Depreciation

\end{tabular}} & \multicolumn{2}{|c|}{\begin{tabular}{l}

2010 \\

Actual

\end{tabular}} & \multicolumn{2}{|c|}{\begin{tabular}{l}

2011 \\

Actual

\end{tabular}} & \multicolumn{2}{|c|}{\begin{tabular}{l}

2012 \\

Actual

\end{tabular}} \\

\hline & & 150 & & 150 & & 150 \\

\hline & 150 & & 150 & & 450 & \\

\hline & (15) & & $(30)$ & & (75) & \\

\hline & & $\frac{135}{285}$ & & $\frac{120}{270}$ & & $\frac{375}{525}$ \\

\hline Inventory: goods and work in progress & 20 & & 45 & & 85 & \\

\hline Accounts receivable & 33 & & 101 & & 124 & \\

\hline Bank and cash & 10 & $\frac{63}{348}$ & $\underline{15}$ & $\underline{161} \underline{431}$ & - & $\frac{209}{734}$ \\

\hline Accounts payable & 20 & & 80 & & 35 & \\

\hline Taxation & 4 & & 17 & & 6 & \\

\hline Overdraft & $=$ & 24 & $=$ & 97 & $\underline{25}$ & 66 \\

\hline Loan & - & & - & & 200 & \\

\hline Deferred tax & 7 & & 9 & & $\underline{23}$ & \\

\hline & & $\frac{1}{(31)}$ & & $(\overline{106})$ & & $\frac{(289}{11}$ \\

\hline Net assets & & $\underline{\underline{317}}$ & & $\underline{\underline{325}}$ & & $\underline{\underline{445}}$ \\

\hline \begin{tabular}{l}

Ordinary share capital ( $£ 1$ shares) \\

General reserve

\end{tabular} & & \begin{tabular}{r}

300 \\

$\frac{17}{317}$ \\

\end{tabular} & & \begin{tabular}{r}

300 \\

$\frac{25}{325}$ \\

\end{tabular} & &  \\

\hline

\end{tabular}

Income Statement (for year ending $\mathbf{3 0}$ June) $£ 000$


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 2012, additional share and loan capital was obtained which enabled extra machinery to be purchased. This gave an immediaté increase in sales and profits.

Although 2011/12 showed the best yet results, the chairman is not very happy; the accountant has suggested that a dividend should not be proposed this year (2012) 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 2010? The real value seems to be about $£ 225,000$. Why is this real value not in the statement of financial position?
\section*{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.
(Institute of Chartered Secretaries and Administrators)