394 Part N Short-term financing and policies Statement of financial position as at 31 May 20XX 51,000 Fixed (non-current) assets Freehold land and buildings at cost Less: Accumulated depreciation Equipment and fittings at cost Less: Accumulated depreciation Motor vehicles at cost Less: Accumulated depreciation 55,000 (4,000 20,000 (5,00) 24,000 6.000 15,000 18,000 34,000 Current assets Stocks Trade debtoes 26,000 59.000 85,000 Less creditors: Amos falling die in one year Trade creditors Proposed dividend Taxation Bank overdraft (88,000) (1,000) (6,000) (10,000) (105,000 (20,000 64,000 20,00KN 44,000 Less creditors: mols falling die beyond one year 14% bank loan (scured on frushold property) Capital and reserves Ordinary El shares Retained profit 25,000 19,000 44,000 Income statement for the year ended 31 May 20XX Sales 660,000 Less: Cost of sales Opening stock Purchases 22,000 426,000 448,000 (26.000 422,000 238,000 (176,000) (38,000) (7,000) Less: Closing stock Gross profit Less: Selling and distribution expenses Administration expenses Finance expenses Net profit before taxation Corporation tax Net profit after taxation Proposed dividend Retained profit for the year (221.000) 17,000 16,000) 11,000 (1.000) 10,000 The company is family-owned and controlled and, since incorporation, has operated without qualified finance staff. However, the managing director recently became concerned with the financial position of the company and therefore decided to appoint a qualified finance director to help manage the financial affairs of the business. Soon after joining the company, the finance director called a meeting of his fellow directors and at this meeting stated that, in his opinion, the company was overtrading Chapter 14 Working capital and short-term asset management 395 Required (a) What do you understand by the term 'overtrading and what are the possible consequences of this type of activity? (b) What are the main causes of overtrading and how might the management of a business overcome the prob- lem of overtrading? (c) Use financial ratios for Micex Computers Ltd that you believe would be useful in detecting whether the company was overtrading. Explain the significance of each ratio you calculate (Certified Diploma)