You are an investment analyst. A client of yours, Mr A, owns 3.5% of the share capital of Price. Price is a listed company and prepares financial statements in accordance with International Accounting Standards. The company supplies machinery to agricultural businesses. The year-end of Price is 31 July and the financial statements for the year ended 31 July 2001 were approved by the directors on 30 September 2001. Following approval, copies of the financial statements were sent to all shareholders in readiness for the annual general meeting which is due to be held on 30 November 2001. Extracts from these financial statements are given below:

Extracts from notes to the financial statements
Finance cost - year ended 31 July

The zero-rate bonds were issued for proceeds of $5 million on 1 August 2000. The lenders are not entitled to interest during their period of issue. The bonds are repayable on 31 July 2004 for a total of $6 802 450. The bonds are quoted on a recognized stock exchange. However, the company intends to hold the bonds until they mature and then repay them.
Revaluation of properties: This is the first time the company has revalued any of its properties.
Depreciation of non-current assets: Depreciation of non-current assets for the year totalled $4 million (2000 - $3 million).
Your client always attends the annual general meeting of the company and likes to put questions to the directors regarding the financial statements. However, he is not a financial specialist and does not wish to look foolish by asking inappropriate questions. Mr A intends to ask the following three questions and seeks your advice based on the information provided. The points he wishes to make are as follows:
Point 1: Why, when the company has made almost the same profit as last year and has borrowed more money through a bond issue, has the company got a bank overdraft of $1.2 million at the end of the year when there was a positive balance of $1.5 million in the bank at the end of the previous year? This looks wrong to me.
Point 2: The Company has a revaluation surplus of $5 million included in the statement of changes in equity. I have never understood this statement. Surely surpluses are shown in the income statement. Perhaps our accountants are unaware of the correct accounting treatment?
Point 3: I don't understand the treatment of the zero-rate bonds. The notes tell me that these were issued for $5 million and no interest was paid to the investors. The accounts show a finance cost of $400 000 and a balance owing of $5.4 million. Is this an error? On the other hand, perhaps the $5.4 million is the fair value of the bonds? I feel sure an International Accounting Standard has been issued that requires companies to value their borrowings at fair value.
Required:
Prepare a reply to Mr A that evaluates the issues he has raised in the three points and provides appropriate advice. You should support your advice with references to International Accounting Standards.

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income statements-year endied 31 July 2001 5000 54 000 (42 000) 12 000 (6 300 5 700 1 600 4 100 (1 200) 2 900 5000 51 000 40 000) 11 000 Cost of sales Gross proff Omer operating exponses Profit from operations Finance cost Profit belcire tax Income tax expense Net profit for the period 5 000 1 000) 4 000 1 200 2 800 Balance sheets-at 31 July 2001 2000 0O0 0OO 3000 Non-current assets: Property plant and equipment Current assets: Inventories Receivables Cash and cash equivalents 44 200 32 000 8 700 3 000 200 7 500 2 000 1 500 21 900 66 100 21 000 53 0D0 Capital and reserves: issued share capital Reserves 20 000 20 300 0 300 15 400 20000 4 000 34 000 Non-current liabilities Current liabilities: Trade payables Tax Bank overdrat 7 800 8 000 1 200 1 200 10 400 66 100 53 000 Statement of changes in equity Balance at 31 July 2000 Surplus on revaluation of properties Not profit for tho period Dividends Balance at 31 July 2001 5000 34 000 2 900 1 600 40 300 Extracts from notes to the financial statements Finance cost-year ended 31 July 2001 $00D 2000 $000 1 000 Nil NII 1 600 On 10% interest-bearing borrowings On zero-rate bonds On bank overdr 400 200 1 600 Non-current liabilities at 31 July 10% borrowings repayable 31 July 2006 Zero-rate bonds 10000 5 400 15 400 10 000 Ni TO 000