Q. Does the firm need to borrow money at the end of the year to meet expenses? Why or why not?
A. Yes, the firm needs to borrow money at the end of the year as it is going in net loss and it will be difficult for it to meet its expenses while running in loss situation. The money to be borrowed is needed due to the following reasons:
Firstly, the firm is already in debts as it is paying monthly interest of 15,000$ on loan notes so it must be considered that further loan taking may also lead to insolvency. If the stakeholders are confident that the loan may result in the recovery of firms’ losses, only then loan should be taken.
Second observation is that the firm is suffering net losses in the last three months of 12,450 $ which means its equity is being used up to meet its expenses. To overcome the situation, and to stop equity from being eaten up by the firms’ daily expenses, the firm must raise loan from any institution so it may recover its expenses.
Further if we analyze the income statement, we observe that 48% of total revenue is being used in wages and salaries but surprisingly the firm is in losses. It is an indication that a layer of idol workers is present that needs to be put to work or fired as they are evidently not adding any value to the company. If the firm is not able tackle that situation properly, it may lead to bankruptcy in future.
*For detailed Income Statement analysis please follow the link:
Unit_10.ans.xlsx
References
Cook, C. Forecasting financial Requirements [PowerPoint slides].
