Question 1 Rewrite the Income Statement and the Balance Sheet of Sandy Manufacturing Pty Ltd; and comment on the financial performance of Sandy Manufacturing Pty Ltd, did the financial performance improve or deteriorate during the past financial year. Use financial ratio analysis to substantiate your answer and provide a complete interpretation of the financial position of the company. 4+8=12 marks Question 2 What credit products will you offer to: a) Mr. Sandy Scott? b) Sandy Manufacturing Pty Ltd? Please substantiate your answer. 4 marks Question 3 Will you offer Mr. Sandy an overdraft facility of $1 500 000 in his own name in order to attract him as a client? Please justify your answer by concentrating on the principles that banks apply when dealing with credit application. Please provide detailed interpretation/explanation about the information to justify your decision. 9 marks INFORMATION: MR SANDY SCOTT AND SANDY MANUFACTURING PTY LTD Background Mr. Sandy Scott, a customer of another bank, approached you as a banker at NAB. Mr. Sandy claimed that he is not happy with this current bank and wants to move to NAB if you could be able to offer him favourable rates and better facilities. He also gave you permission to obtain all the necessary information that you will require from his auditor and current bank, provided that it is regarded as highly confidential and that you sign a document in this regard with his auditor. You obtained the following information from the auditor: Bank statements for three months - Mr. Sandy Audited financial statements for the previous two financial years for the business that Mr. Sandy owns 60% shares in. A letter stating Mr Sandy's income is $600 000 per month. A personal balance sheet for Mr. Sandy. INFORMATION CONTAINED IN THREE MONTH BANK STATEMENTS FROM THE EXISTING BANK OF MR SANDY Tumover on account for three months: $ 2 100 435 Highest balance: $ 724 756 Lowest balance: S(165 433) Interest rate on overdraft facility: Supreme client facility rate - at present 7.7% Bank charges: Standard Overdraft excesses: 2 Cheques returned to drawer (Rd's): None Monthly debit order payments: $ 235 268 per month Approved overdraft facility: $150 000 LETTER FROM AUDITOR Muller Khan Chartered Accountant Tel: (08) 786 7234 Fax: (08) 786 7233 Martell Building Perth 5 JULY 2021 To whom it may concern Based on the information provided to me Mr Sandy Scott earns an amount of $ 600 000 per month as salary and fringe benefits from Sandy Manufacturing Pty Ltd. MULLER KHAN Muller Khan Chartered Accountant Tel: (08) 786 7234 Fax: (08) 786 7233 Martell Building Perth REPORT FROM THE AUDITORS To the shareholders of Sandy Manufacturing Pty Ltd We have examined the financial statements set out on the following pages. In our opinion these financial statements fairly present the financial position of the company at 30 June 2021 and the results of its operations for the year then ended in the manner required by the Corporations Act. However, the format of both Income Statement and Balance Sheet should be modified to comply with standards and convention. MULLER KHAN Perth 5 JULY 2021 REPORT OF THE DIRECTORS FOR THE YEAR ENDED 30 JUNE 2021 To the shareholders Your directors have pleasure in submitting their report in terms of the Corporations Act. BUSINESS The company operated for the entire financial year manufactures specialised parts for the transport and vehicle industry. SHARE CAPITAL No shares were issued during the year under review. FINANCIAL RESULTS 2020 2021 24 300 183 000 Net income before taxation Taxation Net income after taxation 24 300 183 000 FIXED ASSETS The company is at present, as part of its ongoing policy of presenting meaningful financial statements, having its fixed assets valued for insurance purposes. The directors' initial investigations and discussions indicate that a minimum realistic value of the plant and equipment having a book value of $ 2 804 700, is $25 000 000. Once the valuation is complete, it is intended to revalue the assets in question in the books of the company. DIVIDENDS No dividend is proposed in respect of the past year. DIRECTORS Sandy Scott Elianna Scott SANDY MANUFACTURING PTY LTD BALANCE SHEET AT 30 JUNE 2021 2020 2021 Notes 3 1 000 1 000 4 10 651 600 3 054 200 2 961 200 5 637 400 3 029 900 11 1 550 000 14 699 700 4997 800 Share capital Shareholders loans Distributable reserve Long term liability Trade creditor Current portion of long-term liability Bank overdraft Equipment, fittings and vehicles Trade investment Stock 774 900 4 465 000 26 96 300 9927 300 7 093 500 164 300 9 291 100 5 6 5 921 600 1415 400 7 476 900 Debtor 27389 200 5 599 700 Cash on hand 53 200 42 400 SANDY MANUFACUTURING PTY LTD INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2021 2020 2021 PRINCIPAL REVENUE 159 697 500 107 043 200 COST OF SALES Opening stock 7 476 900 6 486 900 Purchases 89 881 400 56 820 100 Closing stock 9 291 100 7476 900 DIRECT OPERATING EXPENSES Repairs and maintenance 1 158 600 21100 Depreciation -tools 100 100 100 000 Depreciation - plant/equip 2455 300 1 075 800 Rent 3958 100 3 883 100 Wages 28 337 400 22 519 800 Water and electricity 1 602 900 1 178 300 OTHER OPERATING EXPENSES Advertising 531 100 256 000 Accounting fee 407 900 Auditors' remuneration 199 000 190 000 Bank charges 497 800 469 600 Bad debts 247 100 Depreciation - motor vehicle 905 900 750 900 Depreciation - Furn/ fittings 215 600 213 100 Marketing & entertainment 3 341 300 2 669 000 General expenses 576 100 479 200 Insurance 2 446 700 2 302 900 Legal expenses 8 100 129 300 Motor vehicle expenses 3 720 000 2 443 200 Printing and stationery 259 100 210 500 Salaries and contributions 17 992 900 10 456 800 Telephone 970 700 668 400 OTHER INCOME Profit on sale of fixed assets 447 500 Interest received 6 000 304 000 INTEREST PAID 2 127 800 1 317 100 NET INCOME FOR THE YEAR 24 300 183 000 NOTES TO THE FINANCIAL STATEMENTS - 30 JUNE 2021 1. ACCOUNTING POLICIES The financial statements have been prepared on the historical cost basis. The main accounting policies adopted by the company, which are consistent with those of the previous year, are as follows: a. Depreciation Fixed assets of the company have been depreciated on a straight line basis over the expected useful life of the assets, after taking into account initial allowances on assets used in the process of manufacturing. Stock Stock has been valued at the lower of cost or net realisable value on a first-in first-out basis. The cost of finished goods and work in progress includes material and direct labour costs only. PRINCIPAL REVENUE b. 2. Principal revenue represents the invoiced value of goods supplied to customers, net of returns and discounts allowed. 2020 2021 3. SHARE CAPITAL Authorised: 400 000 shares of S 1 cach Issued: 1 000 shares of s I cach S 400 000 $ 400 000 $ 1 000 S 1 000 4. SHAREHOLDERS' LOANS $ 4500 000 S4 500 000 Fixed unsecured loans, bearing interest at the rate of 10% (previous year - 9.5%) per annum. No fixed terms of repayment have been sct. Floating loan accounts, having no fixed term of repayment other than by mutual shareholders consent. S6151 600 S 1 137 400 5. NON-CURRENT ASSETS Net book value Cost Accumulated depreciation 17 058 800 14 254 100 2020 Net book value 2021 2 479 400 2 804 700 Plant and vyuipment 341 900 241 800 149 200 267 000 Tools 5 523 300 5 281 500 Office equipment 589 800 440 600 Factory fittings 559 500 394 900 Motor vehicles 4979 800 1 246 600 28 71 200 21617 700 164 600 262 300 2571 000 3 733 200 7092.500 5921600 (Previous year) (24705500) (18783900) 6. TRADE INVESTMENT 2020 2021 Maple Pty Ltd Shares at cost Loan S 2 500 $ 161 800 $ 164 300 $ 2 500 $ 1412 900 $I 415 400 TOTAL The directors are of the opinion that the unlisted investment's value exceeds $ 200 000 SI 400 000 7. STOCK Raw materials S 9 291 100 $ 7476 900 8. ACCOUNTS RECEIVABLE The accounts receivables have been pledged ceded to the company's bankers as security for overdraft facilities. SANDY SCOTT STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2021 ASSETS S 15 000 000 $5 160 000 $ 7500 000 $ 1 527 600 S 5 325 800 Residential property - Mill Point Rd, South Perth Holiday home - Dunsborough Vineyard farm - Margaret River Investments: SANDY MANUFACTURING Pty Ltd - 60% shareholding SANDY MANUFACTURING Pty Ltd - loan account Fixed deposit Vehicles: 2019 Range Rover 2018 Mercedes 600 SL. 2015 Porsche Houschold goods, Persian carpets and work of art S 750 000 S 130 000 S 190 000 S 190 000 $ 1 000 000 $36 773 400 LIABILITIES $ 11 500 000 S 2 500 000 1* Mortgage on Mill Point Rd, South Perth property 1* Mortgage on Dunsborough property 1" Mortgage on farm Bank loans on vehicles Overdraft S4 500 000 $ 400 000 S 50.000 S 18 950 000 Net asset value S 17 823 400 Asset valuations: Peter Bowrie (Property valuer consultant of the bank) valued the properties in the name of Sandy Scott as follows: Residential property - Mill Point Rd, South Perth $ 13 000 000 Holiday home - Dunsborough $ 4 500 000 Vineyard farm - Margaret River $ 6 000 000 TOTAL $23 500 000 You checked Redbook car values (used by dealers in vehicle trading for determining the values of second hand vehicles) and the vehicle values in the balance sheet of Mr Sandy are well aligned with the Redbook car values. The fixed deposit of $750 000 of Mr Sandy has been confirmed with his bank. It is a 12 month fixed deposit that will expire 9 months from now. The bank credit policy contains the following information regarding the assignment of realistic bank collateral values to assets: Type of collateral Value of collateral Investments at this bank 100% of the value of the investment Investments at other financial institutions. 90% of the value of the investment. Listed shares 50% of the market value. Precious coins 60% of the market value Cession of insurance policies 85% of the surrender value of the policy. Fixed property: residential 80% of value as per bank valuation. Fixed property: 70% of value as per bank valuation. commercial/industrial/farms Unlisted shares 0% Motor vehicles 70% of Redbook values ar 50% of book values in financial statements of businesses. Machinery and equipment 0% if no used market price valuation was obtained. 40% of used market value provided by experts like accredited auctioneers and used machinery ccuipment industry dealers Household goods including carpets and 0%. Only in exceptional cases will a maximum of paintings 40% of investment painting values be considered. Expert valuation have to be conducted in such cases. Accounts receivable 40% maximum of regular 90 days or less accounts receivable balances. Office equipment factory fittings 0% Inventory 0% Investments in unlisted companies/loans to 0% companies Question 1 Rewrite the Income Statement and the Balance Sheet of Sandy Manufacturing Pty Ltd; and comment on the financial performance of Sandy Manufacturing Pty Ltd, did the financial performance improve or deteriorate during the past financial year. Use financial ratio analysis to substantiate your answer and provide a complete interpretation of the financial position of the company. 4+8=12 marks Question 2 What credit products will you offer to: a) Mr. Sandy Scott? b) Sandy Manufacturing Pty Ltd? Please substantiate your answer. 4 marks Question 3 Will you offer Mr. Sandy an overdraft facility of $1 500 000 in his own name in order to attract him as a client? Please justify your answer by concentrating on the principles that banks apply when dealing with credit application. Please provide detailed interpretation/explanation about the information to justify your decision. 9 marks INFORMATION: MR SANDY SCOTT AND SANDY MANUFACTURING PTY LTD Background Mr. Sandy Scott, a customer of another bank, approached you as a banker at NAB. Mr. Sandy claimed that he is not happy with this current bank and wants to move to NAB if you could be able to offer him favourable rates and better facilities. He also gave you permission to obtain all the necessary information that you will require from his auditor and current bank, provided that it is regarded as highly confidential and that you sign a document in this regard with his auditor. You obtained the following information from the auditor: Bank statements for three months - Mr. Sandy Audited financial statements for the previous two financial years for the business that Mr. Sandy owns 60% shares in. A letter stating Mr Sandy's income is $600 000 per month. A personal balance sheet for Mr. Sandy. INFORMATION CONTAINED IN THREE MONTH BANK STATEMENTS FROM THE EXISTING BANK OF MR SANDY Tumover on account for three months: $ 2 100 435 Highest balance: $ 724 756 Lowest balance: S(165 433) Interest rate on overdraft facility: Supreme client facility rate - at present 7.7% Bank charges: Standard Overdraft excesses: 2 Cheques returned to drawer (Rd's): None Monthly debit order payments: $ 235 268 per month Approved overdraft facility: $150 000 LETTER FROM AUDITOR Muller Khan Chartered Accountant Tel: (08) 786 7234 Fax: (08) 786 7233 Martell Building Perth 5 JULY 2021 To whom it may concern Based on the information provided to me Mr Sandy Scott earns an amount of $ 600 000 per month as salary and fringe benefits from Sandy Manufacturing Pty Ltd. MULLER KHAN Muller Khan Chartered Accountant Tel: (08) 786 7234 Fax: (08) 786 7233 Martell Building Perth REPORT FROM THE AUDITORS To the shareholders of Sandy Manufacturing Pty Ltd We have examined the financial statements set out on the following pages. In our opinion these financial statements fairly present the financial position of the company at 30 June 2021 and the results of its operations for the year then ended in the manner required by the Corporations Act. However, the format of both Income Statement and Balance Sheet should be modified to comply with standards and convention. MULLER KHAN Perth 5 JULY 2021 REPORT OF THE DIRECTORS FOR THE YEAR ENDED 30 JUNE 2021 To the shareholders Your directors have pleasure in submitting their report in terms of the Corporations Act. BUSINESS The company operated for the entire financial year manufactures specialised parts for the transport and vehicle industry. SHARE CAPITAL No shares were issued during the year under review. FINANCIAL RESULTS 2020 2021 24 300 183 000 Net income before taxation Taxation Net income after taxation 24 300 183 000 FIXED ASSETS The company is at present, as part of its ongoing policy of presenting meaningful financial statements, having its fixed assets valued for insurance purposes. The directors' initial investigations and discussions indicate that a minimum realistic value of the plant and equipment having a book value of $ 2 804 700, is $25 000 000. Once the valuation is complete, it is intended to revalue the assets in question in the books of the company. DIVIDENDS No dividend is proposed in respect of the past year. DIRECTORS Sandy Scott Elianna Scott SANDY MANUFACTURING PTY LTD BALANCE SHEET AT 30 JUNE 2021 2020 2021 Notes 3 1 000 1 000 4 10 651 600 3 054 200 2 961 200 5 637 400 3 029 900 11 1 550 000 14 699 700 4997 800 Share capital Shareholders loans Distributable reserve Long term liability Trade creditor Current portion of long-term liability Bank overdraft Equipment, fittings and vehicles Trade investment Stock 774 900 4 465 000 26 96 300 9927 300 7 093 500 164 300 9 291 100 5 6 5 921 600 1415 400 7 476 900 Debtor 27389 200 5 599 700 Cash on hand 53 200 42 400 SANDY MANUFACUTURING PTY LTD INCOME STATEMENT FOR THE YEAR ENDED 30 JUNE 2021 2020 2021 PRINCIPAL REVENUE 159 697 500 107 043 200 COST OF SALES Opening stock 7 476 900 6 486 900 Purchases 89 881 400 56 820 100 Closing stock 9 291 100 7476 900 DIRECT OPERATING EXPENSES Repairs and maintenance 1 158 600 21100 Depreciation -tools 100 100 100 000 Depreciation - plant/equip 2455 300 1 075 800 Rent 3958 100 3 883 100 Wages 28 337 400 22 519 800 Water and electricity 1 602 900 1 178 300 OTHER OPERATING EXPENSES Advertising 531 100 256 000 Accounting fee 407 900 Auditors' remuneration 199 000 190 000 Bank charges 497 800 469 600 Bad debts 247 100 Depreciation - motor vehicle 905 900 750 900 Depreciation - Furn/ fittings 215 600 213 100 Marketing & entertainment 3 341 300 2 669 000 General expenses 576 100 479 200 Insurance 2 446 700 2 302 900 Legal expenses 8 100 129 300 Motor vehicle expenses 3 720 000 2 443 200 Printing and stationery 259 100 210 500 Salaries and contributions 17 992 900 10 456 800 Telephone 970 700 668 400 OTHER INCOME Profit on sale of fixed assets 447 500 Interest received 6 000 304 000 INTEREST PAID 2 127 800 1 317 100 NET INCOME FOR THE YEAR 24 300 183 000 NOTES TO THE FINANCIAL STATEMENTS - 30 JUNE 2021 1. ACCOUNTING POLICIES The financial statements have been prepared on the historical cost basis. The main accounting policies adopted by the company, which are consistent with those of the previous year, are as follows: a. Depreciation Fixed assets of the company have been depreciated on a straight line basis over the expected useful life of the assets, after taking into account initial allowances on assets used in the process of manufacturing. Stock Stock has been valued at the lower of cost or net realisable value on a first-in first-out basis. The cost of finished goods and work in progress includes material and direct labour costs only. PRINCIPAL REVENUE b. 2. Principal revenue represents the invoiced value of goods supplied to customers, net of returns and discounts allowed. 2020 2021 3. SHARE CAPITAL Authorised: 400 000 shares of S 1 cach Issued: 1 000 shares of s I cach S 400 000 $ 400 000 $ 1 000 S 1 000 4. SHAREHOLDERS' LOANS $ 4500 000 S4 500 000 Fixed unsecured loans, bearing interest at the rate of 10% (previous year - 9.5%) per annum. No fixed terms of repayment have been sct. Floating loan accounts, having no fixed term of repayment other than by mutual shareholders consent. S6151 600 S 1 137 400 5. NON-CURRENT ASSETS Net book value Cost Accumulated depreciation 17 058 800 14 254 100 2020 Net book value 2021 2 479 400 2 804 700 Plant and vyuipment 341 900 241 800 149 200 267 000 Tools 5 523 300 5 281 500 Office equipment 589 800 440 600 Factory fittings 559 500 394 900 Motor vehicles 4979 800 1 246 600 28 71 200 21617 700 164 600 262 300 2571 000 3 733 200 7092.500 5921600 (Previous year) (24705500) (18783900) 6. TRADE INVESTMENT 2020 2021 Maple Pty Ltd Shares at cost Loan S 2 500 $ 161 800 $ 164 300 $ 2 500 $ 1412 900 $I 415 400 TOTAL The directors are of the opinion that the unlisted investment's value exceeds $ 200 000 SI 400 000 7. STOCK Raw materials S 9 291 100 $ 7476 900 8. ACCOUNTS RECEIVABLE The accounts receivables have been pledged ceded to the company's bankers as security for overdraft facilities. SANDY SCOTT STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2021 ASSETS S 15 000 000 $5 160 000 $ 7500 000 $ 1 527 600 S 5 325 800 Residential property - Mill Point Rd, South Perth Holiday home - Dunsborough Vineyard farm - Margaret River Investments: SANDY MANUFACTURING Pty Ltd - 60% shareholding SANDY MANUFACTURING Pty Ltd - loan account Fixed deposit Vehicles: 2019 Range Rover 2018 Mercedes 600 SL. 2015 Porsche Houschold goods, Persian carpets and work of art S 750 000 S 130 000 S 190 000 S 190 000 $ 1 000 000 $36 773 400 LIABILITIES $ 11 500 000 S 2 500 000 1* Mortgage on Mill Point Rd, South Perth property 1* Mortgage on Dunsborough property 1" Mortgage on farm Bank loans on vehicles Overdraft S4 500 000 $ 400 000 S 50.000 S 18 950 000 Net asset value S 17 823 400 Asset valuations: Peter Bowrie (Property valuer consultant of the bank) valued the properties in the name of Sandy Scott as follows: Residential property - Mill Point Rd, South Perth $ 13 000 000 Holiday home - Dunsborough $ 4 500 000 Vineyard farm - Margaret River $ 6 000 000 TOTAL $23 500 000 You checked Redbook car values (used by dealers in vehicle trading for determining the values of second hand vehicles) and the vehicle values in the balance sheet of Mr Sandy are well aligned with the Redbook car values. The fixed deposit of $750 000 of Mr Sandy has been confirmed with his bank. It is a 12 month fixed deposit that will expire 9 months from now. The bank credit policy contains the following information regarding the assignment of realistic bank collateral values to assets: Type of collateral Value of collateral Investments at this bank 100% of the value of the investment Investments at other financial institutions. 90% of the value of the investment. Listed shares 50% of the market value. Precious coins 60% of the market value Cession of insurance policies 85% of the surrender value of the policy. Fixed property: residential 80% of value as per bank valuation. Fixed property: 70% of value as per bank valuation. commercial/industrial/farms Unlisted shares 0% Motor vehicles 70% of Redbook values ar 50% of book values in financial statements of businesses. Machinery and equipment 0% if no used market price valuation was obtained. 40% of used market value provided by experts like accredited auctioneers and used machinery ccuipment industry dealers Household goods including carpets and 0%. Only in exceptional cases will a maximum of paintings 40% of investment painting values be considered. Expert valuation have to be conducted in such cases. Accounts receivable 40% maximum of regular 90 days or less accounts receivable balances. Office equipment factory fittings 0% Inventory 0% Investments in unlisted companies/loans to 0% companies