6. Based on the ratios provided, other information about the company and your knowledge of the industry, which one of the following is true: (10 Marks) | a) Gearing is too high and the loan should be repaid urgently b) The company will have no problems paying its liabilities as they fall due c) Increasing selling prices of computers is likely to increase profit d) Increasing the amount of repair work is likely to increase profit 4 CASE STUDY PART 1 When Ben is made redundant, he decides to run a business selling and repairing computers. In order to do this, he sets up a limited company, Dataloss Limited. He plans to deposit 5,000 in the company's bank account on 1 January 2021 and issue 5,000 shares, with a nominal value of 1 each, in his own name. He also plans to borrow 3,000 from his father. Ben will rent premises for his business at 2,000 a month and lease test and IT equipment for 500 a month. He will pay 3,000 for signage and furniture. For each of the first two months he will spend 7,000 on computers for resale and components for repairs. In the third month he hopes to buy 7,500 of computers on credit. At the outset, he will hire a technician, at a cost of 1,900 a month, to do the repair work, whilst he mostly deals with selling and administration. He will pay himself 800 a month in salary and plans to take further income as dividends. He estimates that he will use 250 worth of electricity per month, to be paid in April. He will pay 1,400 for 12 months' insurance. Other expenses paid for during the period will be: per month Rates Utilities (excluding electricity) Advertising Mileage 350 300 300 200 Each month he hopes to sell computers for 8,750 and charge 2,400 for repairs. At the end of 3 months he expects to have unsold inventory, which would had cost him 10,000. He will depreciate non-current assets at a rate of 20% of original cost per year Dataloss Ltd Cash Budget for the 3 months to 31 March 2021 Jan Feb Mar Total Cash in Shares Loan Sales Repairs Total 5000 3,000 8,750 2,400 19,150 8,750 2,400 11,150 8,750 2,400 11,150 5,000 3,000 26,250 7,200 41,450 2,000 2,000 6,000 500 2,000 3,000 500 7,000 1,900 800 500 7,000 1,900 800 Cash out Rent Signage and furniture Leasing of equipment Computers/components Technician Ben's salary Dividend Electricity Insurance Rates Utilities (excluding electricity) Advertising Mileage Total 1,900 800 1,650 1,500 14,000 5,700 2,400 1,650 1,400 350 350 350 1,400 1,050 900 300 300 300 300 300 300 200 900 600 200 200 17,750 13,350 8,000 39,100 2,350 Net cash in Opening balance Closing balance 1,400 0 1,400 (2,200) 1,400 (800) 3,150 (800) 2,350 PART 2 Dataloss Ltd Budget Income Statement for the 3 months to 31 March 2021 Sales Revenue: Sale of computers Repairs 26,250 7,200 33,450 (17,200) 16,250 less less Cost of Sales Gross Profit Operating expenses: Rent Leasing of equipment Ben's salary Electricity Insurance Rates Utilities (excluding electricity) Advertising Mileage Depreciation 6,000 1,500 2,400 750 350 1,050 900 900 600 150 14,600 1,650 Operating profit 0 Opening inventory Purchases Technician salary Closing inventory Cost of Sales 21,500 5,700 (10,000) 17,200 Dataloss Ltd Budget Statement of Financial Position as at 31 March 2021 f ASSETS Non-Current Assets Fixtures and fittings 2,850 Current Assets Inventory Prepaid expense Cash at Bank 10,000 1,050 2,350 13,400 Total Assets 16,250 EQUITY AND LIABILITIES Equity Share capital Retained profit 5,000 0 5,000 Non-Current Liabilities Loan 3,000 Current Liabilities Trade payables Accrued expense 7,500 750 8,250 Total equity and liabilities 16,250 Workings W1 Tools and equipment Cost Depreciation Carrying amount at 31 March 2021 3,000 -150 2,850 W2 Insurance paid Insurance for period Prepaid expense c/f 1,400 -350 1,050 Dataloss Ltd Statement of Cashflows for the 3 months to 31 March 2021 f Cash flows from operating activities Rent Leasing of equipment Computers and components Technician salary Ben's salary Insurance Rates Utilities (excluding electricity) Advertising Mileage Dividends Sales revenue Net Cash used in Operating Activities (6,000) (1,500) (14,000) (5,700) (2,400) (1,400) (1,050) (900) (900) (600) (1,650) 33,450 (2,650) Cash flows from investing activities Signage & furniture Net cash used in investing activities (3,000) (3,000) Cash flows from financing activities Issue shares Loan Net cash used in financing activities 5,000 3,000 8,000 Net increase in cash and cash equivalents Cash and cash equivalents at 1/01/2021 Cash and cash equivalents at 31/3/21 2,350 0 2,350 The following ratios have been calculated from the financial statements for the 3 months to 31 March 2021 Acid test: 0.41 Gross profit margin: 48.6% GPM for repairs is 20.8%, GPM for computers is 67.6% Gearing: 37.5%