16. A private company: Raising and granting loans. (Harper & Grant Ltd. Overcomes the risk of a take-over and ensures the favourable redistribution of the share capital). (l of b, Unit 13, 17, 21)

Harper&Grant Ltd is on the verge of the biggest crisis in the history of the firm. The shares of the company are distributed so that Peter Wiles’s mother and Hector Grant own the lion’s share with 20%. Ambrose Harper has left much money to form a trust and actually money to his sister. H.G. and his colleagues have to raise a loan and buy enough of the shares to keep the controlling interest. The total share capital must have a market value about five hundred thousand $ when Ambrose Harper died. A bank officer thinks HG can’t provide security since the loan is required by good self of Mr Grant. Mr Brewer should have to apply to head office but they wouldn’t grant a loan without some form of security. The deads of house of Mr Grant are a perfect guarantee for this. For that, there is an opportunity to raise a second mortgage on the property. In this case, Mr Grant could have a straight loan and pay 2% of bank rate and the rate of interest actually would be 9%. It would be a short term loan for three years.

Grant decides to do the accounts more often than HG does at present. Quarterly accounts don’t allow them to keep a close enough control. If profitability goes down, that is profits in relation to sales turnover or in relation to capital employed, it may be necessary to increase prices, cut costs and so on. Each manager would be responsible for at least one cost centre. He would be required to forecast willing advance, the income and the expenditure of the centre. Then approved budgets become the annual budget or the plan of the company.

17. Auditing the accounts of a limited company. (l of b, Unit 19)

Every year the accounts of a limited company must be approved by auditors, acting on behalf of the shareholders. Their duty is to ensure that the directors are reporting correctly on the state of affairs of the company. They do not judge whether the directors are managing the company efficiently or not. That is something the shareholders must judge for themselves.

Until recently, the accounts of Harper&Grant have been audited by Hector Grant’s son-in-law, who is in private practice as an accountant. And now a new firm of auditors has now been appointed.

So, they have to be satisfied that everything which goes into making up the Profit Statement, the Balance Sheet and the Directors’ Report is correct.

The Profit Statement (Trading & Profit & Loss Account) shows how the profit for the year is arrived at. It starts with net sales or income and deduct surplus from which depreciation on plant and buildings, auditors’ fee, administration and selling costs must be deducted to produce net profit (or loss).

The Balance Sheet is a summarized statement, showing the amounts of funds employed in the business (usually consist of the issued share capital, reserves & retained earnings) and the sources from which they derived.

The totals on the two sides of the Balance Sheet must agree.

One of the most difficult jobs in preparing the accounts is stock valuation: that is putting a value on all goods in the hand of the company. It may seem easy, as goods could be counted and then the price paid for them could be checked against the supplier’s invoices. But the value of goods is often fluctuates. So, the rule for stock valuation is that it should be taken at cost price or market price, whichever is the lower.