Finances of Nuplex Industries Limited and Johnsons P/L - Assignment Example

Running header: corporate accounting Student’s name: Instructor’s name Subject code: Date of submission: 1. The options available to Johnsons P/L for financing the proposed expansion can be divided into two including internal sources of finance and external sources of finance. As the name suggests, internal sources of finance include finance that is generated from within the business and may include; a) Sale of assets where the company may decide to sell off the assets that are old and obsolete or those assets it does not need currently in its bid to raise additional finance. The major advantage of this is that the company will have better use of its capital and that this source of finance does not attract interest neither does it dilute ownership. However, the business may not have obsolete assets currently and hence this option may be impractical in such circumstances. b) Retained profits- the company may use its ploughed back profits in case it is huge enough to fully finance the proposed expansion. The advantage of using retained assets is that it does not lead to additional liabilities as well as interest obligations. In addition, the ownership of the company is not diluted. However, the company may not have enough retained profits to finance the proposed expansion and hence this may not be a practical source. c) Reduction in working capital that may include cutting down the level of stocks in a bid to raise additional finance. This option may lead to reduced storage costs while it is a cheap source of finance that does not lead to increased liabilities. In addition, this form of financing does not lead to diluted ownership by existing members. However, this source of financing is not in line with the company’s intention to expand the business. The option may also lead to shortage of stock and hence loss of revenue. External sources of finance for the business may be divided into two including short-term financing and long-term finance. Forms of short term financing include the following; a) Bank overdraft –this is where the bank would allow the company to overdraw its account to a certain limited mainly for meeting short term liabilities obligations. Bank overdrafts have the advantage in that no collaterals are required while the overdraft limit can be extended depending on the company’s needs. However, thissource of financing may not be available for such a big project owing to its being short-term in nature. In addition, its interest’s rates vary and are bigger than those of bank loans. The company also risks entering into cash flowproblems if the repayment is demanded at a short notice. b) Trade credit –the main advantage for trade credit is that no interests are required. However, this may not be an ideal source of finance for expansion purposes due to its size. Furthermore, the company may not enjoy trade discounts and hence profits may be affected. c) Factoring debts implies selling bills or debt to debt factoring company at a lower price. However, the company may not have any debts to factored while this is an expensive source of finance. Medium source of financing include leasing of assets and may involve leasing such items as buildings and machinery for periodic payments for a specified time period when the business may or may not purchase the asset. With leasing, the business is able to benefit from the asset without purchasing it while maintenance of the asset is usually undertaken by the leasing firm (Johansen, 2011). However, this is an expensive form of financing and the total cost of leasing may eventually be higher than the asset purchase price. Long-term financing for the business may include; a) Long-term bank loan for limited time periods. The interest may either be fixed or variable. The advantage of loans is that huge amounts may be borrowed in accordance to the company’s financing needs. In addition, it does not interfere with ownership and management of the company provided its able to meet its obligations to the bank. On the other hand, this leads to increased liabilities for the company and is an expensive source of financing owing to interest obligations while the company may not have the required collateral. b) Going public or selling shares –is a permanent source of financing for limited companies or companies willing to go public. The main advantage of selling shares/going public is that it is a permanent finance source while the business is not required to pay interests but dividends in case it makes profits. However, this source of financing leads to diluted ownership for the existing members. c) Debentures- these are certificates of acceptance of loans given under the company’s stamp and carrying an obligation for the company to pay the investor a fixed return and the principal amount on the debenture’s maturity. The main advantage is that debentures are transferable and do not carry a voting right and hence are not threats to the current ownership. However, they carry a mandatory interest obligation which increases the company’s liabilities. 2. Nuplex industries limited Nature of business Nuplex industries limited are a leading global manufacturer of resins used in paints coatings and structural materials. It has an integrated sales, manufacturing and R&D network across Australia, New Zealand, Europe, Asia and North America. Subsidiaries include; a) Nuplex Specialties- the subsidiary is a leading distributor of raw materials, ingredients and specialty chemicals in New Zealand, Pacific island and Australian markets. b) Nuplex master batch is a leading specialty company that provides various products and services including color matching in various markets within and outside Australia. Net profit after tax The company’s net profit after tax for the company experienced a decline in 2013 when it recorded a net profit after tax of $45,295,000 compared to $64,507,000 in 2012. Despite the declining profitability, the company is still highly profitable . As such, I would still consider investing in the company since the company is likely to make even greater profits in the future. Types of shares The type of shares being issued are ordinary shares. The external auditor The company’s external auditor is PWC (Price WaterHouse Coopers). The role of the external auditor is that of expressing an opinion on the company’s financial statements based on the Audit the auditor carries out in accordance to international auditing standards and international standards on auditing. The company is required to comply with relevant ethical requirements, plan and perform the audit to obtain reasonableassurance about whether the financial statementsare free of material misstatements In accordance with the financial reporting act of 1993, the auditor should i) Report on whether they have obtained all the information and explanation they have required ii) Whether in their opinion, proper accounting records have been kept by the company as far as it appears from the examination of the records. 3. Issuance of shares Johnsons P/L Journal entries To record issuance of shares Date Details Debit Credit 18th April 2013 Cash Common stock To record receipt of application money for ordinary stock. $24,320,000 $24,320,000 30th April 2013 Common stock Cash To record Return of the extra application fees received. 320,000 320,000 12th May 2013 Cash Common stock To record money received on 1st call $15,000,000 $15,000,000 30th June 2013 Cash Common stock To record money received on 2nd and final call. $21,000,000 $21,000,000 References: Nuplex, 2013, Annual Report, Retrieved on 23rd August 2014, from http://www.nuplex.com/Corporate/getattachment/fa47929e-bb6a-4208-b837- 41d348e1ca92/document.aspx Johansen, B2011, Financial accounting, London, Rutledge. Read More