international accounting

1. Assume that you are a member of Albert Wang Management Consultants. Prepare a report for the board of directors of BBJ Leisurewear Ltd that: 1. Analyses the problems faced by the company both quantitatively and discursively.

2. Sets out a detailed plan of action for dealing with its financing problem. This should include both a financial plan as well as a narrative discussion. All assumptions made should be clearly stated.

3. Comment briefly on the role the auditors have been playing.

1
TMA OCT 2013: International Accounting and Finance
BBJ Sportswear
‘This is absolutely typical of British banks. As soon as you have any success they
want to pull the plug and stop you trading.’ Baldeep was very angry. She is the
managing director of BBJ Sportswear Ltd and had just received a letter from the
company’s bank requiring a significant reduction in the overdraft. ‘This is ridiculous,’
agreed Mike, the production director. ‘Last year we had a cracking year and it looks
set to continue. We had a big order in from Arena just this morning. If we can’t keep
up the overdraft, we won’t be able to fulfil that order.’ Arena was one of several
national chains of casual and sportswear stores that were placing substantial orders
with BBJ, usually to be sold under the BBJ label but in some cases under the stores’
own brand label.
BBJ Sportswear Ltd was started by Baldeep and Mike five years ago. The business is
a designer and manufacturer of casual and leisure clothes aimed particularly at the
younger, higher income market. From the outset, Baldeep and Mike decided that BBJ
Sportswear would be a design and marketing led business. Much of the forward
planning was concerned with integrating the product design and development with
the sales and marketing operations of the business. The new company had taken a
lot of trouble and spent a lot of money on employing a young and talented design
team, led by Jane who had been employed previously as a chief designer for a
leading sportswear brand. The range of clothes designed by Jane and her team was
greeted with enthusiasm by the major buyers, and this was converted into firm
orders by the marketing team led by Baldeep. The order book began to grow and, for
the new season, orders had reached their highest level ever.
BBJ Sportswear began trading during a period of recession when people did not
have a great deal of money to spend on clothes. However, sales started to increase
significantly as the economy began to come slowly out of recession and as export
markets in Europe and China were opened. Baldeep and Mike were both surprised
and delighted by the speed with which the sales of the business had grown in recent
years and by the growing base of regular customers. The order just received from
Arena was seen as particularly important. If Arena became a regular customer, the
sales of the company were likely to increase rapidly over the next few years and
would establish BBJ Sportswear as a major player in the market. Baldeep and Mike
had both invested their life savings in the business and had taken out large
mortgages on their respective houses to help finance the new company.
However, this provided only a relatively small amount of the total ordinary share
capital needed. In order to raise the remaining share capital, friends, family and
business contacts were approached. The largest shareholder of the business was
Singh Estates Ltd, owned by Dravid and Jatin Singh. The two Singh brothers had
made large profits by land speculation over the years but were keen to diversify into
other areas as their business had been particularly hard hit by the recent recession.
They had known Baldeep for many years and were convinced that she and Mike
would make a success of the new business.
2
The board of directors of BBJ Sportswear Ltd and their shareholdings were as
follows:
Baldeep Sahota Managing director and marketing director (350,000 shares)
Mike Greaves Production director (350,000 shares)
Jane Holloway Design director (20,000 shares)
Dravid Singh Chairman (1,000,000 shares owned jointly with brother Jatin
through Singh Estates)
Jatin Singh Non executive director
In addition to his role as production director, Mike tended to look after financial
matters. Though the company had accounts staff who dealt with the day to day
transactions, there was no one within the company who had any great financial
expertise. When there was a problem, the company’s auditors were normally asked
for advice. On the day that the letter from the bank was received, a board meeting as
due to take place to consider the draft accounts of the business for the year that had
ended two months earlier. At this meeting, the letter from the bank was also
distributed to board members for discussion. Mike Greaves began the discussion by
saying:
“We’ve just received the draft accounts from the auditors, which seem to confirm our
success. Profit has more than doubled. I really can’t see how the cash situation is so
poor. I know that we spent a lot on that additional plant and that we didn’t get
anything from the old machines we got rid of, but most of that was covered by the
bank loan. Really, the cash situation should be even better than the profit level
implies because the expenses include about £2.8 million for depreciation and we
don’t have to write a cheque for that.”
Baldeep, who was still angry at what she regarded as the highhanded attitude of the
bank, pointed to the difficulties that the bank’s demands would cause:
“The bank wants us to reduce the overdraft by half over the next six months! This is
crazy. I tried to explain that we have important orders to fulfil but the manager wasn’t
interested. How on earth can we find this kind of money in the time available? We
are being asked to do the impossible.”
Both Mike and Baldeep had, before the meeting, hoped that the Singh brothers
would be prepared to help out by purchasing further shares in the company or by
making a loan. However, it was soon made clear by Dravid Singh that further
investment was not a possible option. Singh Estates had been experiencing
considerable problems over recent years and simply did not have the money to
invest further in BBJ Leisurewear. Indeed, the Singh brothers would be prepared to
sell their shares in BBJ to generate much needed cash for their ailing company.
Finding a prospective buyer for the shares was not, however, a likely prospect at this
point. Both Dravid and Jatin Singh had been heavily involved in recent years with the
problems of Singh Estates and had taken little interest in the affairs of BBJ
Leisurewear. The board meeting made them realise that they should have been
much more attentive, and they now faced the prospect of being major shareholders
of two failed companies unless things could be radically improved.
3
After several hours of discussion, it was clear that the financial issue was not going
to be resolved at the meeting. Instead, it was agreed that expertise from outside the
company should be sought to help the company find a feasible solution to the
problem. The board decided to approach Albert Wang Management Consultants,
which specialises in helping businesses with financial problems, and to ask the firm
to produce a plan of action for the board’s consideration.
The accounts of BBJ Sportswear for the past two years are set out in the Appendices.
Assume that you are a member of Albert Wang Management Consultants. Prepare a
report for the board of directors of BBJ Leisurewear Ltd that:
1. Analyses the problems faced by the company both quantitatively and
discursively. (50 marks)
2. Sets out a detailed plan of action for dealing with its financing problem. This
should include both a financial plan as well as a narrative discussion. All
assumptions made should be clearly stated. (40 marks)
3. Comment briefly on the role the auditors have been playing. (10 marks)
Appendices:
Income statement for the year ended 31 December
2011 2012
£000s £000s
Turnover 14,006 22,410
Cost of sales 7,496 11,618
Gross Profit 6,510 10,792
Operating expenses 4,410 6,174
Operating profit 2,100 4,618
Finance costs 432 912
Profit before tax 1,668 3,706
Tax 420 780
Profit after tax 1,248 2,926
Dividends proposed and
paid 600 800
Retained profit for the
year 648 2,126
Retained profit brought forward
from previous year 2,626 3,274
R .Profit carried forward 3,274 5,400
4
Balance statement as at 31 December
2011 2012
£000s £000s
Non Current Assets 8,600 14,470
Current assets
Inventories 2,418 5,820
Receivables 1,614 3,744
Other receivables 268 402
Cash 56 8
4,356 9,974
Total Assets 12,956 24,444
Current Liabilities
Payables 1,214 2,612
Other payables 248 402
Dividends 600 800
Taxation 420 780
Bank overdraft 4,250
Total current liabilities 2,482 8,844
Non current liabilities
Loan 3,600 6,600
Total liabilities 6,082 15,444
Capital and Reserves
Ordinary shares of £0.50 each 3,600 3,600
Retained profit 3,274 5,400
Total
Equity and
Liabilities 12,956 24,444

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