intAhandout.doc

UNIVERSITY OF BRISTOL

ACCG 11900

INTRODUCTION TO ACCOUNTING A

LECTURER: IAN CRAWFORD

DEPARTMENT OF ECONOMICS

LECTURE HANDOUTS AND EXAMPLES

FOR AUTUMN AND SPRING TERMS2003 AND 2004

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COURSE OUTLINE:

Week Topic

INTRODUCTION TO FINANCIAL ACCOUNTING1 Background, introduction to the main financial statements2 The three main financial statements3 More on balance sheets and profit and loss accounts4 More on cash flow statements5 Accruals and prepayments, depreciation and sale of fixed assets,

bad and doubtful debts6 Incomplete records re debtors and creditors and cost of sales,

introduction to trial balances and double entry7 More on double entry, and more incomplete records8 Test9 Working capital management, bank reconciliations10 Ratio analysis

CHRISTMAS HOLIDAY1 PROGRESS TEST2 Tackling exam-style questions

Attendance at the progress test in the first lecture of the spring term is compulsory – students failing to attend without provision of a medical note risk losing credit points for the course. The test is important as the material in Unit A is cumulative and it is vital that you revise as you go along. It is also regarded as an official progress test by many departments. Attendance at your weekly tutorials is also compulsory – your tutor is the best person to help you if you encounter difficulties. If you fail to attend a tutorial you must explain your absence to the economics department information office 1C4 (email [email protected], tel. 0117 928 8415). Tutorial exercises and appropriate reading for the course are detailed in the question pack.

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mailto:[email protected]

HEALTH WARNING

I expect you to read (and abide by) the grey paragraph on the previous page regarding attendance requirements, especially at tutorials and the progress test. No-one is exempt from these requirements, not even civil engineers working on projects.

I expect you to do your best to arrive at the lecture theatre on time. Arriving 5 minutes late on a regular basis will get you noticed!

If you ever have trouble reading overhead slides, I expect you to put your hand up and tell me at the time, and/or sit nearer the front of the lecture theatre. I will do my best to ensure all lecture material is clearly legible. Please remember to bring your lecture handouts with you!

I expect you to keep an eye on the economics department notice boards and my web pages for additional information about the course (this can be found at http://staff.bath.ac.uk/mnsipc/). Your tutorial groups will be notified to you via lists to be placed on the notice boards in D block of social sciences. Tutorials normally take place in E and F block, also in social sciences.

Students sometimes complain about the amount of work this course involves. As it is a 20 credit point course, you can expect to spend 1/6th of your time working on this course. Based on a 40 hour working week, this would be almost 7 hours including the lecture and tutorial. This course is not designed specifically for first years and it is not an ‘easy ride’. Second, third and fourth years will also be taking this course and it may count towards their final degree classification. The level of the course is therefore set to take that into account, but don’t worry if you are not a mathematician or an engineer - it does also recognise that some students come from a non-mathematical background. You just need grade A mathematics at GCSE level (or equivalent).

This is a 20 credit point course using the 12-12-6 system. There are therefore lectures every week of the autumn and spring terms, and for the first 4 weeks of the summer term, although where possible the lectures in the summer term will be revision lectures. There are exercises set every week which are important for you to do not only to receive credit points, but also to master the material (practice is the only way to get to grips with Unit A in particular). You may also need to look things up in either the recommended text, or another introductory level accounting text book. I would strongly advise you to use your tutor’s knowledge should you experience problems, or email me on [email protected]

The recommended text book for both units of this course is Accounting and Finance for Non-Specialists, 4th edition, by Atrill and McLaney, Prentice Hall.

This course is assessed by is a single 3 hour examination in the summer which covers both Unit A and Unit B. Units A and B are co-requisites - you have to take them both. Past exam papers can be found in the social sciences library at any time, along with copies of the recommended texts (and a selection of alternative texts at a similar level). Past papers and solutions are usually available in the summer term for a small charge to cover photocopying.

Finally, I hope you enjoy the course!

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http://staff.bath.ac.uk/mnsipc/

LECTURE 1

ACCOUNTING INFORMATION

What does it record and who is it for?

Past events Future events External users Internal users

Published Budgets Suppliers ManagersFinancial and Government Employees

Statements Forecasts Investors

Banks ShareholdersOther Lenders

FINANCIAL ACCOUNTING (Introduction to Accounting A)

External reporting/users Legal requirements Financial information Produced annually Past events

ACCOUNTS

Paint a picture of a business

Three main statements:

The balance sheet shows the net worth= ASSETS – LIABILITIES

OWNS OWES

The profit and loss account and cash flow statement explain how changes in the net worth came about, i.e. show

(i) Profitability(ii) Liquidity

An example of a set of actual company accounts is at the back of the handout

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FUNDAMENTAL ACCOUNTING CONCEPTS

Accruals (matching)

Consistency

Prudence

Going concern

Substance over form

WHAT OTHER ‘RULES’ AFFECT ACCOUNTS?

Companies: Accounting Standards / Accountancy bodies

Companies Acts / Company Law

Stock Exchange Requirements

Audit Reports / Judgements

Other types of business:

Taxation Requirements

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BUSINESSES

Remember that we always account for the assets and transactions of a business separately from the assets and transactions of its owner(s).

Three main types of business:

Sole Traders (single owner)

Partnerships (multiple owners)

Companies (single or multiple owners)

New business form:

Limited Liability Partnerships (multiple owners)

To become a company, must ‘incorporate’.

DIFFERENCES DUE TO INCORPORATION

Liability of owners

Taxation differences

Succession and control

Financing opportunities

Costs of compliance and administration

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LECTURE 2

THREE FUNDAMENTAL FINANCIAL STATEMENTS

1. Balance Sheets

Show: ‘A snapshot of a business at a point in time.’

The net worth of a business.

Assets and liabilities, working capital, owners’ equity, sources of finance.

Definitions:

Net Worth = Total Assets (‘owned’) – Total Liabilities (‘owed’)

Total Assets = Fixed Assets (to be used > 1 year) + Current Assets

Total Liabilities = Long-Term Liabilities (to be repaid > 1 year) + Current Liabilities

Working Capital = Net Current Assets = Current Assets – Current Liabilities

Owners’ Equity = Capital (share capital if company) + Reserves (eg retained profits)

The Balance Sheet Equation:

Net Worth = Owners’ Equity

This equation can be re-arranged or re-written to give us different formats for the balance sheet:

Horizontal Format: Total Assets = Total Liabilities + Owners’ Equity

Vertical Format #1: Fixed Assets + Working Capital – Long-Term Liabilities = Owners’ Equity

Vertical Format #2: Fixed Assets + Working Capital = Long-Term Liabilities + Owners’ Equity

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Pictorial Representation

This is a pictorial diagram of a balance sheet. It shows what happens to cash within a business.

The area within the dotted line represents working capital (strictly speaking, cash is excluded from the definition of working capital, although ‘working capital’ is often used interchangeably with ‘net current assets’). This is a manufacturing business, so stock consists of raw materials and work-in-progress as well as finished goods. Stock is always valued at total cost for financial reporting purposes. In particular, the value of work-in-progress will include cost of raw materials, manufacturing overheads, and manufacturing labour. We will revisit stock costing in Unit B management accounting.

Note that the picture above is just another representation of the balance sheet equation - total cash from all sources of capital = total cash in all areas in which capital has been invested.

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EXAMPLE OF A SIMPLE BALANCE SHEET

Bristol Industries : Balance Sheet as at 30.09.01(Vertical Format #1)

FIXED ASSETS£ £

Freehold Premises 50,000Plant and machinery 20,000Motor Vehicles 10,000

80,000

INVESTMENTS 24,900

CURRENT ASSETS

Stocks 10,000Trade debtors and prepayments 15,000Cash 100

25,100

LESS: CURRENT LIABILITIES

Trade creditors and accruals 15,000Bank overdraft 10,000

25,000

NET CURRENT ASSETS 100

LESS: LONG-TERM LIABILITY

Loan, secured by mortgage on Freehold Property (20,000)85,000

REPRESENTING:CAPITAL AND RESERVES

Proprietor's capital 50,000Plus: Retained profits 35,000

85,000

Notes: If this was a company, ‘proprietor’s capital’ would be issued share capital.

If this was a sole trader, ‘proprietor’s capital’ would be the owner’s investments in the business.

‘Retained profits’ in the balance sheet are the accumulated retained profits over the business’ life. Businesses may have other reserves, for example ‘share premium’ (if a company issues shares for consideration greater than their nominal value), and ‘revaluation reserve’ (if fixed assets are restated to a higher current value).

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INTRODUCTION TO ACCOUNTING PRO-FORMA ACCOUNTS

Invented Ltd Balance Sheet as at X/X/XX(Vertical Format #2)

£ £Fixed assets xCurrent assets: stock x

debtors and prepayments xcash in hand (petty cash) x

__x__

Current liabilities: creditors and accruals xproposed dividend xbank overdraft xtax owed x

__x__

Working capital (net current assets) x__x__

FINANCED BY:Issued ordinary shares of £x xReserves (balance b/f + x retained profit for this year from the P&L a/c) x

__x

x% unsecured loan stock (= long-term liability) x__x__

Notes: As this business is a company, it has share capital in the bottom of the balance sheet. Distributions to its owners (the shareholders) are called ‘dividends’ and appear at the bottom of the profit and loss account before arriving at retained profit for the period.

If this business was a sole trader or partnership, distributions to its owners are called ‘drawings’ and may appear either as an expense at the bottom of the profit and loss account before arriving at retained profit for the period, or in the bottom of the balance sheet (deducted from ‘net profit’ for the period).

See also the set of real company accounts reproduced at the back of the lecture handouts.

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Impact of Different Business Forms:

Remember, in vertical format balance sheets the owners’ equity always appears at the bottom of the balance sheet, but this part of the balance sheet looks different depending on the form of the business:

Sole Trader:£ £

Capital brought forward (at start of year) (note 1) XXXAdd: Net Profit (earned in year) XXX Less: Drawings (note 2) (XXX)

XXXCapital carried forward XXX

Note 1: In the company’s first year of business, the owner will invest some money (‘capital’) in the business – include this here.

Note 2: Drawings are cash or goods taken out of the business, by the owner, for personal use. If drawings are already deducted in the profit and loss account to arrive at ‘retained profit’, then use retained profit instead of net profit and do not deduct drawings here.

Partnership:Partner: A B Total

£ £ £ Capital brought forward XXX XXX XXX Add: Share of net profit (note 3) XXX XXX XXX Less: Drawings (XXX) (XXX) (XXX)Capital carried forward XXX XXX XXX

Note 3: This is determined by the ‘partnership agreement’.

Company:£

Issued Share Capital (note 4)Ordinary Shares (note 5) XXXPreference Shares (note 6) XXX

ReservesShare Premium (note 7) XXXProfit and Loss Account (retained profits) XXX

XXX

Note 4: A company may issue any amount of shares up to its authorised limit.Note 5: Ordinary shareholders run the company and share the risk.Note 6: Preference shareholders may have guaranteed annual dividends and, if the

company liquidates, will recover their investment before any money is paid out to ordinary shareholders.

Note 7: Issued share capital is shown at its ‘nominal value’ – but shares may actually be sold for more than their nominal value when they are first issued. The difference is share premium.

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2. Profit and Loss Accounts

Show: A ‘history book’ or record of transactions over the past accounting period.

The profitability of the business (difference between income and expenditure).

Prepared on an ‘accruals’ basis (i.e. transactions recorded in the period to which they relate, regardless of the actual timing of the related cash flows).

Explain changes in Net Worth from the previous to the current balance sheet.

Definitions:

Profit = Income - Expenditure

Income = Sales Revenue + Other Income (eg interest receivable)

Expenditure = Cost of Sales + Expenses (eg administration)

Gross Profit = Sales Revenue – Cost of Sales

Net Profit = Gross Profit + Other Income – Expenses

Retained Profit = Net Profit – Dividends (if company – sometimes deduct drawings here if sole trader)

Cost of Sales = Opening Stock + Purchases – Closing Stock (retail business)

= Opening Stock + Purchases + Other Manufacturing Costs - Closing Stock(mnfing business)

3. Cash Flow Statements

Show: A ‘history book’ or record of cash flows over the past accounting period.

The liquidity of the business.

Sources and applications of funds.

Explain changes in cash from the previous to the current balance sheet.

Note:

Profit is NOT the same as cash – and cash is NOT the same as profit!

Profit and loss accounts are produced on the ‘accruals’ basis: income and expenditure is ‘matched’ to the year it is earned or incurred.

We need cash flow statements as well as profit and loss accounts because of the importance of cash to the survival of a business.

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Invented Ltd Profit and Loss Account for the year to X/X/XX

£ £Sales x }

Less: cost of goods sold } opening stocks x }

Add: purchases x }____ }

x } theLess: closing stocks (x) } ‘trading

____ } account’(x) }

____ }Gross profit x }

Less: expenses Rents x Wages x Depreciation x Directors' fees x Audit fees x Bank interest x

____(x)

____Net profit before finance charges xInterest on (long-term) loan stock (x)

____Net profit before tax for the year xTax payable (x)

____Net profit after tax x

Dividends (paid and proposed) (x) }____ } the

Retained profit for the year [ change in net worth of x }‘appropriation business] ____ } account’

Note: Remember that these figures have been calculated on an accruals basis, rather than being based on cash flows. This means that we have matched amounts earned against expenses owed, irrespective of whether or not the cash has actually been received or paid.

Profit before finance charges is sometimes also called PBIT (profit before interest and tax) and sometimes also called operating profit. Note that bank interest paid on short-term borrowings (i.e. overdrafts) is treated as an ‘operating expense’ whereas interest on long-term borrowings (i.e. loans, debentures, mortgages) is a ‘finance charge’.

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Invented Ltd Cash Flow Statement for the year to X/X/XX

£ £

Reconciliation of Operating Profit to Net Cash Flow from Operating ActivitiesOperating Profit (= PBIT) X Depreciation charges X Profit on disposal of fixed assets (X)Increase in stocks (X)Increase in debtors (X)Increase in creditors X Net Cash Flow from Operating Activities X

Cash Flow StatementReturns on Investments and Servicing of FinanceInterest Received X Interest Paid (X)

X Taxation (X)Capital Expenditure (X)

X Equity Dividends Paid (X)

XManagement of Liquid ResourcesPurchase of Treasury Bills (X)Sales of Treasury Bills X

X FinancingIssuing of Ordinary Share Capital X Repurchase of Debenture Loan (X)Expenses Paid in Connection with Share Issues (X)

X Increase in Cash X

Note: ‘Capital Expenditure’ is expenditure on purchases of fixed assets. Cash received from sales of fixed assets is also included in this total.

Note: ‘Taxation’ is tax paid in the year.

Note: You do not need to know all the headings for the cash flow statement, but you do need to know what goes into the reconciliation of operating profit to net cash flow from operating activities, and what goes into the cash flow statement itself.

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LECTURE 3

Lecture example 1: Balance Sheets

A. A Sole TraderDr Seatham Rythe set up as a dentist on 1st January last. As of today he has:

£Surgery at cost 2,000Equipment at cost 985Cash in Bank 289Amounts due to creditors 47Petty cash on hand 4

You are required to arrange this information in a way that will show Dr Rythe's position as clearly as possible.

B. A PartnershipFast and Furious started a grocery business on 1 March this year. They agreed to share profits and losses equally and each contributed £1,000 in cash, which was used to buy assets as follows:

£ £

Furniture and Fittings 400Stock 350Motor van 180Shop Premises, at cost 1,700Less: secured loan (700)

______1,000

Cash 70_____

2,000_____

Required: Draft a Balance Sheet to show the position of the partnership.

C. A Limited CompanyCosmetics Ltd is a company dealing wholesale in beauty preparations etc. The following are the balances shown in its ledger at 1 January of this year:

£Ordinary shares of £1 10,000

6% Preference shares of £1 5,000Buildings 12,300Stocks of cosmetics 5,040Debtors 3,026Creditors 2,900Bank (overdraft) 1,615Mortgage on buildings 3,000Motor Lorry 500Cash 9Deposit with building Society 1,640

Required: Prepare a suitable Balance Sheet for the company.

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Lecture example 1: Solutions

(A) A sole trader

Dr Seatham Rythe - Balance Sheet at today's date

Fixed Assets £ £Surgery - at cost 2,000Equipment - at cost 985 2,985

Current AssetsCash at bank 289Petty Cash 4

-------293

Less Current LiabilitiesCreditors (47 )

Net Current Assets 246-------3,231

Owner’s Equity 3,231

(B) A partnershipFast and Furious - Balance Sheet as at 1st March 2001

Fixed Assets £ £ £Shop premises - at cost 1,700Furniture and fittings - at cost 400Motor van - at cost 180

------- 2,280

Current AssetsStock - at cost 350Cash 70

------- 420-------

Total Assets 2,700Less: Long-term LiabilityLoan (secured on shop premises) (700)

-------

2,000

Fast Furious TotalOwners’ Equity 1,000 1,000 2,000

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(C) A limited companyCosmetics Ltd: Balance Sheet as at 1st January 2001

Fixed Assets £ £Buildings 12,300Motor lorry 500

-------- 12,800

Current AssetsStocks of cosmetics 5,040Debtors 3,026Deposit with Building Society 1,640Cash 9

-------9,715

DEDUCT

Current LiabilitiesCreditors, due within one year (2,900)Bank overdraft (1,615)

(4,515)

Net Current Assets 5,200

Less: Long-term LiabilitiesMortgage loan (secured on buildings) (3,000)

15,000

Capital and ReservesOrdinary shares of £1 each,fully paid 10,0006% Preference shares of £1 each,fully paid 5,000

----------15,000

NOTE:1. There are many detailed format and disclosure requirements for company accounts,

which will not be studied in this course. These requirements come from the Companies Acts and from Accounting Standards.

2. This particular example is a little artificial in that the net current assets, less long-term liabilities, just match the nominal value of share capital (the actual market value of shares may be different to this). Normally, there would also be a surplus or deficit reserve which would be the accumulated profit or loss attributable to ordinary shareholders. This may be a missing figure which you have to work out.

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Lecture example 2: The Ashton Company

The Ashton Company has been manufacturing electrical switch gear for many years. In July 2001 the accountant of the company disappeared and with him disappeared the accounting records.

You are approached by the owner of the business and asked to prepare a statement of the business assets and liabilities in the form of a Balance Sheet as at 31st August 2001. By checking with the bank, counting materials on hand, investigating the ownership of buildings and plant, circularising customers, etc., you establish the following information:

£Cash in hand 50Balance at bank (overdrawn) 350Stock of raw materials 17,500Stock of finished goods 10,000Amounts receivable from customers in respect of credit sales 30,000Investments quoted on the Stock Exchange 2,500Freehold Land 20,000Buildings 35,000Plant and Machinery 50,000

Bills received from suppliers indicate that £18,000 is owed to trade creditors. A mortgage of £12,500 (secured on the freehold land) is outstanding, and becomes repayable by the company in 2006. Ashton calculates, by referring to his own records, that he put £100,000 into the business as capital.

Set out the balance sheet as at 31 August 2001 based on the information shown above.

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Lecture example 2: Suggested solution

Balance sheet as at 31 August 2001

FIXED ASSETS £ £ Freehold land 20,000 Buildings 35,000 Plant and machinery 50,000

_______105,000

INVESTMENTS 2,500

CURRENT ASSETS Stock: raw material 17,500

finished goods 10,000 Debtors 30,000 Cash in hand 50

_______57,550_______

LESS Current Liabilities

Trade Creditors 18,000 Bank Overdraft 350

_______18,350_______

NET CURRENT ASSETS 39,200

LESS: LONG TERM LIABILITIES

Mortgage loan (12,500)

_________134,200_________

CAPITAL AND RESERVES Proprietor's capital 100,000

Retained profit* 34,200________134,200________

* This item is not supplied in the question but if the information in the question is

complete, retained profits £34,200 must be the missing item required to balance the

Balance Sheet. You must get used to dealing with ‘incomplete records’ like this.

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How transactions affect the Balance Sheet:an easy example

Every business transaction has two effects. We can see how this works as follows:

1. A proprietor subscribes (invests) £1,000 cash to start up a new business. This is shown as follows:

JOE SMITH BALANCE SHEETat T0

£ £Current Assets

Cash 1,000

Representing:Proprietor’s capital 1,000

2. £100 of the money is spent on stock. The balance sheet now becomes:


£ £

Current Assets

Stock 100

Cash 900

Net Assets 1,000

Representing:

Proprietor’s capital 1,000

3. The stock is sold for £150, giving rise to a profit of £50. We now have:


£ £Current Assets

Cash 1,050

Representing:Proprietor’s capital 1,000Retained profits 50

1,050

The net worth of the business has increased to £1,050 as a result of this transaction.

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4. A further £50 of stock is now bought on credit:


£ £Current Assets

Stock 50Cash 1,050

1,100

Current LiabilitiesTrade creditors 50

Net Current Assets 1,050

Representing:Proprietor’s capital 1,000Retained profits 50

1,050

5. We can also construct a Profit and Loss Account as follows:£

Sales 150Cost of Sales 100Profit 50

This shows how the increase in the net worth of the business over the period in question has arisen, i.e. how much profit has been made and retained (kept) in the business.

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Lecture example 3: The Ashton Company again

In the month of September, 2001, the Ashton Company makes the following transactions:

£Cash sales 14,800Credit sales 35,270Cash received from customers in respect of credit sales 29,500Raw materials bought on credit 25,140Cash paid to suppliers in respect of credit purchases 18,000Manufacturing labour and overhead paid 20,000Other non-manufacturing expenses paid 2,690

You also discover that at 30 September 2001, raw materials stocks are valued at £15,000, stocks of finished goods are valued at £11,000, and there are no stocks of work-in-progress.

All cash movements go through the bank account.

Set out the profit and loss account for the month of September, and show how the balance sheet as at 30 September would now look.

Hint: As well as the cost of purchases of raw materials, ‘cost of goods sold’ in the trading account will include the other manufacturing expenses (labour and overhead).

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Lecture example 3: Solution

The Ashton Company Profit and Loss Account for September 2001 £ £

Sales (14,800 + 35,270) 50,070Less: Cost of Goods Sold

Opening stock (17,500 + 10,000) 27,500Purchases 25,140Manufacturing expenses 20,000Less: Closing stock (15,000 + 11,000) (26,000)

(46,640)Gross Profit 3,430

Other expenses (2,690)

Profit 740

The Ashton Company Balance Sheet as at 30 September 2001 £ £

Fixed Assets (no change) 105,000

Investments (no change) 2,500

Current AssetsStock (15,000 + 11,000) 26,000Debtors (30,000 + 35,270 - 29,500) 35,770Cash in hand (no change) 50Cash at bank 3,260 (-350 + 14,800 + 29,500 - 18,000 - 20,000 - 2,690)

65,080Current Liabilities

Creditors (18,000 + 25,140 - 18,000) 25,140Bank Overdraft -

25,140Working Capital 39,940

Less: Long-Term Liabilities (no change) (12,500)

Net Assets 134,940

Representing:Proprietor’s capital (no change) 100,000

Retained profit (34,200 b/f + 740) 34,940 134,940

Note: it was necessary to work out the new debtors and creditors figures using the old (b/f) figures and the information given in the question. The debtors and creditors figures were missing numbers due to incomplete records. We also had to work out the new cash figure.

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LECTURE 4

HOW TO PREPARE A CASH FLOW STATEMENT

Summary balance sheets for a company for two years:

2001 2000£'000 £'000 CHANGES

FIXED ASSETS

Cost 3,500 2,850 650Accumulated depreciation (860) (540) (320)

_________________ _________________

2,640 2,310CURRENT ASSETS

Stocks 450 275 175Debtors 250 100 150Cash at bank 58 23 35

CURRENT LIABILITIES

Creditors (415) (320) (95)LONG-TERM LIABILITIES

Loan (280) – (280)_________________ _________________

2,703 2,388_________________ _________________

SHARE CAPITAL 1,900 1,600 300

RETAINED PROFIT 803 788 15_________________ _________________

2,703 2,388_________________ _________________

SIMPLIFIED PROFIT AND LOSS ACCOUNT FOR THE YEAR

£'000Sales 2,255Less: cost of sales (1,640)Annual depreciation charge (320)Other expenses (250) (2,210)

_________________ _________________

Operating profit 45Less: interest (30)

_________________

Retained profit 15_________________

Note: ‘Depreciation’ is a way of spreading the cost of a fixed asset over its useful economic life (>1 year, by definition of fixed assets). It is an application of the accruals concept. It is not a cash payment – that only happens at the time you buy the asset. We will see how we calculate depreciation next week. Note also that the balance sheet includes the accumulated depreciation (over the life of the asset) whereas the profit and loss account includes only the depreciation charge for the period in question (in this case, a year).

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SIMPLIFIED CASH FLOW STATEMENT FOR 2001

£000Reconciliation of Operating Profit to Net Cash Flow from Operating Activities

operating profit 45

Adjustments for non cash flow items

depreciation 320increase in stocks (175)increase in debtors (150)increase in creditors 95

________________

Net cash flow from operating activities 135

Returns on investment and servicing of finance

Interest paid (30)

Capital expenditure

purchase of fixed assets (650)

Financing

issue of new shares 300new loan 280 580

__________ ________________

Increase in cash at bank 35

________________

Note: We have added back the annual depreciation charge (from the profit and loss account) in the first part of the cash flow statement. In the balance sheet, depreciation that has accumulated over the life of the assets is deducted from the fixed asset cost to fixed asset net book value. But in the profit and loss account and cash flow statement we are only concerned about the depreciation charge for the period in question.

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Lecture example 4 - Nick’s Newsmart

A friend of yours who owns a newsagents and confectionery business has asked for your help. He is very worried because he suspects that a shop assistant is stealing money from his till. He comments as follows:"For the year to 31 March 2001 my shop made a profit of £8,600 yet I have had to ask the bank for an overdraft", then adds "will you check the figures for me please?". You agree to help and he supplies the following information.

Nick's NewsmartBALANCE SHEETS AS AT 31 MARCH

2000 2001£ £ £ £

FIXED ASSETS

Premises, at cost 16,000 16,000Less acc. depreciation 3,600 12,400 3,900 12,100

_________________ _________________

Fixtures & fittings, at cost 3,000 8,200Less acc. depreciation 1,000 1,300

_________________ _________________

2,000 6,900--------- ---------

_

14,400 19,000CURRENT ASSETS

Stocks: magazines, periodicals 5,400 8,060sweets, tobacco 1,480 3,240

Debtors: trade 2,200 4,900other 140 420

Bank 6,400 – Cash 280 500

_________________ _________________

15,900 17,120_________________ _________________

CURRENT LIABILITIES

Creditors: trade 4,200 3,600other 100 120

Bank overdraft – 4,000_________________ _________________

4,300 7,720_________________ _________________

WORKING CAPITAL 11,600 9,400--------- ---------

NET ASSETS EMPLOYED £26,000 £28,400--------- ---------

Opening capital 24,600 26,000

Add net profit 6,800 8,600_________________ _________________

31,400 34,600Less: drawings (5,400) (6,200)

______ ______Closing capital £26,000 £28,400

--------- ----------_

You confirm that he has not disposed of any fixed assets during the year. You are required

to prepare a cash flow statement to show Nick where his profit has gone.

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NICK'S NEWSMART : SUGGESTED SOLUTION

Cash Flow Statement for the year to

31 March 2001

£Operating profit from accounts 8,600

Depreciation 600

Increase in stocks (4,420)

Increase in debtors (2,980)

Decrease in creditors (580)____________________

Net cash from operating activities 1,220

Returns on investment and servicing of finance

Drawings (6,200)

Capital expenditure

Payments to acquire fixtures and fittings (5,200)____________________

Decrease in cash and cash equivalents (10,180)____________________

Note: the depreciation charge for the year is calculated from the change in the accumulated depreciation in the balance sheets. This is easy to do as we are told that there are no disposals of fixed assets. We will see what the impact of disposals of fixed assets on the accumulated depreciation balances is next week, so that we can take account of it, if necessary, in future.

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LECTURE 5

ACCRUALS AND PREPAYMENTS

The Balance Sheet sometimes contains ‘accruals’ in current liabilities, and ‘prepayments’ in current assets. This is because of the accruals, or ‘matching’ concept.

Example:

Bristol Industrial Company Ltd paid its annual buildings insurance of £4,000 on 30 June 2001. On 5th October 2001 it received an electricity bill for £560 for the quarter ended 30 September 2001.

If the annual insurance paid on 30 June 2000 was £3,600 and other electricity costs for the year totalled £1,200, what are the amounts for insurance expense and electricity expense that should be included in the Profit and Loss Account for the year ended 30 September 2001?

Operating expenses in the P&L: £insurance (9/12*£2,700 + 3/12*4,000) 3,700electricity (£1,200 + £560) 1,760

How should this information be reflected in the Balance Sheet as at 30 September 2001?

£Prepayment (current assets)insurance (9/12*4,000) 3,000

Accrual (current liability)electricity 560

OTHER EXAMPLES OF MATCHING

‘Depreciation’ is a way of spreading the cost of a fixed asset over its useful economic life (>1 year, by definition of fixed assets). It is not a cash payment itself – that happens at the time you buy the asset. Depreciation is a measure of the ‘consumption’ of the fixed asset - it matches the cost of using the fixed asset over a particular accounting period, with the benefits gained from using the asset in that period (accruals concept).

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DEPRECIATION

Fixed assets are recorded in the balance sheet at ‘net book value’ (NBV), where NBV = cost - accumulated ‘depreciation’. When they are sold, the business makes a profit if the sales proceeds exceed the NBV.

Annual depreciation is charged to the profit and loss account.

Two main methods used – ‘straight line’ and ‘reducing balance’.

Suppose a lorry costing £40,000 was purchased by Bristol Industrial Company Ltd.

The lorry is estimated to have a useful economic life of 4 years, after which it will have

a scrap value of £4,000.

Calculate the annual depreciation charge to the profit and loss account and the amount

of accumulated depreciation for each year of the lorry’s life, under

(1) Straight line depreciation;

(2) Reducing balance depreciation at the rate of 50%.

Accumulated depreciation is deducted from the fixed asset cost in the balance sheet

(to give net book value - NBV). This is the total depreciation charged to date.

29

When a fixed asset is sold we need to calculate the profit or loss on disposal. This is

done by comparing the sale proceeds received with the asset's NBV at the date of sale.

E.g. an asset was acquired 2 years ago for £100,000. It has an estimated scrap value of

£20,000 and an estimated useful economic life of 4 years. Straight-line depreciation is

charged for 2 years. Calculate the profit or loss on disposal in each case if in year 3

the asset is sold for:

(1) £50,000;

(2) £80,000.

THE EFFECTS OF FIXED ASSET DISPOSALS ON CASH FLOW STATEMENTS

When a fixed asset is sold, the business will make/receive: a profit or a loss on disposal cash proceeds from the sale

In the reconciliation of operating profit to net cash flow from operating activities, we: add back a loss on disposal deduct a profit on disposal

In the main body of the cash flow statement, we: show the cash sales proceeds as a cash inflow (under ‘Capital expenditure’ if you want to

use headings)

30

NOTES ON METHODS OF DEPRECIATING FIXED ASSETS

Accounting convention accepts that there are different ways in which the charge for depreciation can be calculated. Different methods will produce a different pattern of depreciation charges over the life of the fixed asset. This is considered essential as different assets will be consumed at varying rates or the fall in value of different assets will vary considerably.

The most common methods of depreciation are given below:

Keyo = original cost of fixed asset

s = scrap value of asset at the end of its useful lifen = the useful life of the asset in yearsr = annual rate of depreciationd = annual charge for depreciation

1. Straight line methodThe annual depreciation charge is the same each year and is calculated as:

2. Reducing balance method

An equal annual percentage of the undepreciated balance is charged as depreciation. Thus the amount of the annual charge diminishes each year. The rate of depreciation may be calculated as:

r ns

o 1 Note: A scrap value is required for this calculation and a small scrap value

must be assumed if none is considered likely.

If you are asked to use the reducing balance method you will be given the appropriate rate to use:

The annual depreciation charge in year 1 is equal to the rate multiplied by the asset’s original cost. In subsequent years, it is the rate multiplied by the asset’s NBV at the start of the year.

3. Sum-of-the-digits method

This is a simplified variation of the reducing balance method. It is best explained by using an example. If n = 5, then the depreciation charge is:

Year 1 d o s

5

5 4 3 2 1( )

Year 2 d o s etc

4

5 4 3 2 1( ) .

4. Physical usage method

This method apportions the net cost of the asset (o – s) in accordance with the physical usage of the asset. Thus with a machine that is capable of making a certain number of units, or in a mine that contains a certain amount of deposit, this method is appropriate.

Let x be the total physical number of units available from the fixed asset and z be the number of units used in the accounting period.

Then dz

xo s ( )

There are other methods of depreciation and the charge for depreciation can be made on the basis of any rational rule which allocates cost over useful life in accordance with the consumption of the asset.

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NOTES ON BAD DEBTS

Write off if given up hope – this is a one-off event for a SPECIFIC debtor or receivable

Charge to P/L expensesReduce total debtors in B/S

i.e. ELIMINATE ALTOGETHER

Provisions for doubtful debts, carried forward in Balance Sheet - can be specific OR general

Include increase or decrease from last year’s balance sheet in P/L expensesDeduct BALANCE c/f from debtors total on face of Balance Sheet.

Example

A company's debtors total £120,000 at 30.9.00. Of these, one customer who owes £20,000 is about to go into liquidation and it is not anticipated that any of this amount is to be recovered. The company makes a 2% provision for doubtful debts each year and the balance (provision) b/f from last year is £1,600.

1. Write-off the bad debts

Charge P/L: Bad debts written off £20,000Reduce B/S Debtors go down to £100,000

2. Make provision for doubtful debts

Charge P/L with difference, i.e. need 2% x £100,000 = £2,000. Already have balance b/f of £1,600. So in P&L expenses we will have:

Increase in provision for doubtful debts £400

In Balance Sheet we will see

Current AssetsDebtors 100,000

Less: provision for doubtful debts (2,000)______

98,000

What happens if the provision decreases from one year to the next?

Note that we only need to provide for general doubtful debts against the balance of £100,000 (i.e. after writing off bad debts) as otherwise we would be accounting for the bad debts twice over.

32

LECTURE 6

INCOMPLETE RECORDS

SUMMARY OF CALCULATIONS OF DEBTORS AND CREDITORS/CREDIT SALES AND PURCHASES

• What number is missing?

Opening debtors("already owed") x

+ Credit sales in period("extra sales") x

___

Total owed "T"

___

Amounts received in the period xin respect of credit sales (from debtors)

+ Amounts written off x

+ Still owed (closing debtors) x___

Total owed "T"

___

33

N.B. Use this page to write out the similar summary for credit purchases.

34

COST OF SALES

Also known as cost of goods sold.£

Opening stock x from last year's balancesheet (current assets)or cost of sales (P&L)

Add: Purchases x often needs to becalculated if creditpurchases are involved

______

xLess: Closing stock (x) from this year's balance

sheet (current assets)______

COST OF SALES x______

Missing Values

Sometimes have just sales or cost of sales, and information about profits, and need to work out the missing number (cost of sales or sales).

If profit percentage is a ‘margin’ it is based on sales.

If profit percentage is a ‘mark-up’ it is based on cost of sales.

e.g. Know sales are £1,000, at a mark-up of 25%. What is cost of sales?Cost of sales 125% = sales = £1,000.So cost of sales = sales 100 = £800

125

e.g. Know cost of sales is £500, profit margin on sales is 20%. What is sales?Sales 20% = profit = sales – cost of salesSales 80% = cost of sales = £500So sales = cost of sales 100 = £625

80

Be prepared to combine elements of incomplete records!

For example, you may need to use profit information to find the total sales figure, subtract cash sales to find credit sales, then use credit sales to find the closing debtors figure for your balance sheet.

35

TRIAL BALANCES

Before producing balance sheets and profit and loss accounts, a useful check on your figures is to produce a ‘trial balance’.

Separate your balance sheet and profit and loss amounts into ‘debit’ (DR) and ‘credit’ (CR) balances as follows:

Balance Sheet ItemsDR CR

Asset Liability (Claim)Capital and Reserves

Profit and Loss Account ItemsDR CR

Expense Income (Revenue)Drawings/Dividends Profit

The total of the list of debit balances should equal the total of the list of credit balances. If it doesn’t, there is a mistake or a missing number (incomplete record) somewhere!

Example Trial Balance (balance sheet items only)

DR CR£ £

Land and Buildings cost 50,000Buildings accumulated depreciation 4,000Machinery cost 12,000Machinery accumulated depreciation 3,000Stock 3,500Trade debtors 5,000Provision for doubtful debts 500Cash in hand 45Bank overdraft 2,000Trade creditors 3,600Mortgage 30,000Capital 10,000Reserves (incl. retained profit) 17,445

70,545 70,545

Sometimes, reserves may be a missing figure. Note that we do not need to show the profit and loss account balances separately, because they are already included in retained profit for the year (part of reserves).

NB: All debit balances represent ASSETS or EXPENSES (or DRAWINGS).All credit balances are LIABILITIES or REVENUES (or CAPITAL).

36

LECTURE 7

"DOUBLE ENTRY" - AN OVERVIEW

Balance Sheet AccountsDR CR

Asset + Liability (Claim) +Liability – Asset –

Profit & Loss AccountsDR CR

Expenses + Income +Income – Expenses –

Remember:Profit for period net worth of the Business

Every transaction has two effects - one is always a debit and one is always a credit.

37

A SIMPLE BOOK-KEEPING EXAMPLE - JOE SMITH REVISITED

‘Journal’ Entries:£

Start business – invest £1,000 cash

Dr cash 1,000 Cr capital 1,000

Purchase stock for cashDr purchases 100 Cr cash 100

Sell stock for cashDr cash 150 Cr sales 150

Purchase stock on creditDr purchases 50 Cr trade creditors 50

‘T’ Accounts

Cash at Bank Capital

Bal c/f_________________ _________________ ______________ _________________

_________________ _________________ ______________ _________________

Balance b/f

Trade Creditors Stock

Bal c/f Bal c/f_________________ ________________ ______________ _________________

_________________ ________________ ______________ _________________

Balance b/f Balance b/f

Sales Purchases

Trading Account Profit and Loss Account (Reserves)

Bal c/f______________ _________________

______________ _________________

Balance b/f

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Note: we have a problem dealing with stock. Closing stock at the end of one period becomes the opening stock at the beginning of the next period. Opening stock affects the profit and loss account, while closing stock affects both the profit and loss account and the balance sheet. We do not account for stock as we go along during the year, but only at the year ends when we hold a stocktake.

The book-keeping entries are summarised as follows:

£Enter the opening stock in the trading account:

Dr trading account X Cr stock (balance sheet) X

(note that in the example above there is no opening stock, but normally it would have been carried down as a debit balance in the stock ‘T’ account)

Enter the closing stock in the trading account:Dr stock 50 Cr trading account 50

A SIMPLE EXAMPLETHE TRIAL BALANCE

£ £DR CR

Cash 1,050Stocks 50Creditors 50Capital 1,000Profit and Loss Account 50

_________________ _________________

1,100 1,100_________________ _________________

Make sure that you could produce this without any help! Note that it amounts to a list

of the balances brought down at the end of the period. It provides one in-built check of

whether or not your calculations are numerically correct. (Note that unfortunately,

accounts can still be incorrect even if they "balance"!)

39

Lecture example 5: The Ashton Company revisited

The trial balance at 31 August 2001 is as follows (see Lecture example 2):

DR CR£ £

Land (NBV) 20,000Buildings (NBV) 35,000Plant and machinery (NBV) 50,000Investments 2,500Stock - raw material 17,500Stock - finished goods 10,000Debtors 30,000Cash in hand 50Trade creditors 18,000Bank overdraft 350Mortgage 12,500Proprietor’s capital 100,000Retained profit (reserves) 34,200

165,050 165,050

In the month of September 2001, the Ashton Company makes the following transactions (see Lecture example 3, page 21):

£Cash sales 14,800Credit sales 35,270Cash received from customers in respect of credit sales 29,500Raw materials bought on credit 25,140Cash paid to suppliers in respect of credit purchases 18,000Manufacturing labour and overhead paid 20,000Other non-manufacturing expenses paid 2,690

You also discover that at 30 September 2001, raw materials stocks are valued at £15,000, stocks of finished goods are valued at £11,000, and there are no stocks of work-in-progress.

All cash movements go through the bank account.

Show the journal entries and ‘T’ accounts reflecting the transactions for the month of September. Prepare the trial balance as at 30 September 2001.

40

Lecture example 5: Suggested solution to ‘T’ accounts

Cash at Bank Trade CreditorsBal b/f 350 Bal b/f 18,000

Bal c/f______________ _________________

______________ _________________

Balance b/f || Stock - Raw Materials

Bal b/f 17,500

Bal c/f_________________ _________________ ______________ _________________

_________________ _________________ ______________ _________________

Balance b/f

Trade Debtors Stock - Finished GoodsBal b/f 30,000 Bal b/f 10,000

Bal c/f Bal c/f_________________ _________________ ______________ _________________

_________________ _________________ ______________ _________________

Balance b/f Balance b/f

Sales Purchases

Manufacturing Expenses Non-Manufacturing Expenses

Trading Account Profit and Loss Account (Reserves)Bal b/f 34,200

Bal c/f______________ _________________

______________ _________________

Balance b/f

41

Lecture example 5: Suggested solution trial balance as at 30 September 2001

You should check that your trial balance balances, and that you could use it to produce the balance sheet (on page 22, lecture example 3).

DR CR£ £

Land (NBV) 20,000Buildings (NBV) 35,000Plant and machinery (NBV) 50,000Investments 2,500Stock - raw materialStock - finished goodsDebtorsCash in hand 50Trade creditorsBank overdraftMortgage 12,500Proprietor’s capital 100,000Retained profit (reserves)

42

Lecture example 6: George Square

George Square had the following balances in his books as at 1.1.01:TRIAL BALANCE 1.1.01

Dr Cr£ £

Trade creditors 2,300Stocks of raw materials 1,200Work-in-progress 1,400Stocks of finished goods 700Machinery, at cost 2,500Accumulated depreciation 500Bank overdraft 1,250Trade debtors 1,500Proprietor's capital 3,250

7,300 7,300

His transactions during the year are shown below. All cash transactions are conducted by means of the bank account and all factory costs with the exception of depreciation are assumed to add to the value of cost of sales. All transactions are for cash unless stated otherwise.

1. Bought office premises by means of a long-term mortgage for £4,000.

2. Spent £3,000 on raw materials. He paid £2,200 by cheque and bought the remainder on credit.

3. Paid wages of £4,000 of which £1,500 was for office staff and the remainder for direct factory labour.

4. At the year end, stocks of raw materials were valued at £1,500, work-in-progress was valued at £4,850, and finished goods were valued at £1,200.

5. Rent on the factory premises of £300 was paid.

6. George Square took £400 as drawings during the course of the year.

7. Insurance on the office and factory machinery of £600 was paid (2/3 was for office premises).

8. £900 was paid for electricity and a further £100 was outstanding at the end of the year.

9. Finished goods costing £2,500 were sold on credit for £6,000. £7,000 was received from debtors during the year.

10. The machinery is to be depreciated at the rate of £250 p.a. and the office premises at the rate of £500 p.a.

REQUIRED:

1. Write up George Square's ledger for the year, including separate accounts for the various expenses and sources of revenue.

2. As you write up the ledger, record in journal form how you would deal with each transaction.

3. Prove that your work balances by drawing up a Trial Balance at the end of the year.

4. Produce a Trading and Profit and Loss Account, Balance Sheet and Cash Flow Statement.

1. What is your assessment of the performance of George Square's business during the year?

43

GEORGE SQUARE: SUGGESTED SOLUTION TO ‘T’-ACCOUNTS

Capital Machinery - CostBal. b/f 3,250 Bal. b/f 2,500

Office Premises - Cost Mortgage loanLoan 4,000 Office Premises 4,000

Stock of Raw Materials Stock of Finished GoodsBal. b/f 1,200 Trading account 1,200 Bal. b/f 700 Trading account 700Trading 1,500 c/f 1,500 Trading 1,200 c/f 1,200account account

2,700 2,700 1,900 1,900

b/f 1,500 b/f 1,200

Stock of Work in Progress PurchasesBal. b/f 1,400 Trading account 1,400 Cash 2,200Trading account

4,850 c/f 4,850 Creditors 800 Trading account 3,000

6,250 6,250b/f 4,850

44

Cash at Bank Trading AccountDebtors 7,000 Bal. b/f 1,250 Raw mat.s 1,200

Purchases 2,200 W.I.P. 1,400 Sales 6,000Wages - factory 2,500 Fin. Goods 700Wages - office 1,500 Raw mat.s 1,500Rent 300 Purchases 3,000 W.I.P. 4,850Drawings 400 Wages factory 2,500 Fin. Goods 1,200Insurance 600 Rent 300

Bal. c/f 2,650 Electricity 900 Electricity 7509,650 9,659 Insurance 200 P&L account 3,500

b/f 2,650

Insurance ElectricityBank 600 Bank 900

Trading account 200 Other Creditors 100 Trading account 750P&L account 400 P&L account 250

Trade Creditors DebtorsBal. b/f 2,300 Bal. b/f 1,500 Bank 7,000

Sales 6,000 c/f 500c/f 3,100 Purchases 800

3,100 3,100 7,500 7,500b/f 3,100 b/f 500

45

Accumulated depreciation P&L Depreciation Exp.Bal. b/f 500 Acc Depn (mach) 250P&L Depn (mach) 250 Acc Depn (prem) 500

Bal c/f 1,250 P&L Depn (prem) 500 P&L account 7501,250 1,250

Bal b/f 1,250

Wages - Office SalesBank 1,500 Debtors 6,000

P&L account 1,500 Trading Account

6,000

Wages - Factory RentBank 2,500 Trading account 2,500 Bank 300 Trading account 300

Drawings Other CreditorsBank 1,500 P&L account 1,500 Electricity 100

46

ACCG 11900: Introduction to Accounting A

George SquareTrial balance at end of the year

Dr. Cr.£ £

Office premises 4,000Acc. depreciation 500Machinery 2,500Acc. depreciation 750Stocks of raw materials 1,500WIP 4,850Finished goods 1,200Debtors 500Creditors 3,200Bank 2,650Loan 4,000Capital 3,250

EITHER

Gross profit (from trading account) 3,500Office Wages 1,500Drawings 400Insurance 400Electricity 250Depreciation expense 750

17,850 17,850OR

Retained profit for year (from P&L account, not shown in suggested solution)

200

14,550 14,550

REMEMBER: Check that you can produce a balance sheet, profit and loss account and cash flow statement from the trial balance. How has the business performed during the year??

47


Missing Credit Sales/Purchases in double entry terms:

Receivables/Sales/Debtors

Balance b/f (opening balance) – last year's Balance Sheet

X Cash received from debtors during the year – bank a/c

x

Credit sales for year (may be a missing figure!)

X Bad debts written off in year

x

Returns inwards x

Closing debtors (receivables) – current asset in this year's Balance Sheet

x

__________ __________

X X__________ __________

Payables/Creditors

Payments made during the year (Bank a/c)

X Opening balance b/f at start of year – last year's Balance Sheet

X

Returns outwards XCredit purchases during the year (may be 'missing figure')

X

Closing creditors – current liability is this year's Balance Sheet

X

__________ __________

X X__________ __________

NOTE for revision: it is not always the same figure that is missing from the above calculations and it is essential that you understand how the transactions fit

48


together in order to: (i) work out what information you have not been given in a question and then (ii) calculate the missing number.

49


Example:

Bristol Industrial Company Ltd’s bank statements show that £25,600 cash was received from customers during the quarter ended 30 September 2000. At the beginning of the quarter their records show that there were debtors of £4,925. Unfortunately, a computer virus has destroyed all the subsequent accounting records. The credit controller can remember that debtors at the end of the quarter were £5,103 and that during the quarter bad debts of £260 had been written off.

What were the credit sales for the quarter?

Bristol Industrial Company Ltd makes all its sales at a mark-up of 20% and does not make any sales for cash. What was the cost of sales for the quarter?

Stocks at the beginning of the quarter were valued at £3,100 and a stock-take at the end of the quarter valued stocks at £3,840. What were total purchases for the quarter?

If all purchases are made on credit, creditors at the beginning of the quarter totalled £6,376, and the bank statement shows that payments to creditors during the quarter were £17,382, how much does Bristol Industrial Company Ltd owe its suppliers at the end of the quarter?

50


Lecture example 7: Chippendale

Chippendale is the owner of a furniture shop. On 31 December 1999 his book-keeper retired and the accounts of the business were subsequently kept by Chippendale's secretary. Her double-entry was completely accurate (i.e. debits = credits), and she produced the following trial balance at 31 December 2000.

Dr Cr

£ £Capital – Chippendale 22,035

Drawings – Chippendale 22,600Loan at 15%: interest 12,000Freehold property 17,500Vans – cost 20,800Vans – accumulated depreciation 3,710Shop fittings – cost 16,300Shop fittings – accumulated depreciation 4,200Stock at 31 December 1999 32,832Trade debtors at 31 December 1999 7,817Trade creditors at 31 December 1999 14,712Purchases 185,298General expenses 37,146Wages 42,183Cash sales 254,451Credit sales 32,870Provision for doubtful debts at 31 December 1999 367Bank 3,431Cash 300

__________________365,276 365,276__________________

The following additional information is available:

1. When Chippendale acquired his present premises he also purchased an identical shop next door, the two freeholds costing £110,000. During 2000 the shop next door was sold for £127,500.

2. The secretary did not know how to deal with debtors so she ignored them entirely. The 'credit sales' account represents the cash received from debtors during 2000. By matching these receipts against the file of sales invoices, it appears that the amount due by debtors at 31 December 2000 was £14,898. Of this total, £832 represents bad debts and a further £437 is regarded as doubtful.

3. A similar situation existed with the creditors. The 'purchases' account debit is the total amount paid to suppliers during 2000; the total of unpaid invoices at 31 December 2000 was £18,002.

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4. Stock at 31 December 2000 was valued at a cost of £49,451. Included in this figure were items of stock which had originally cost £9,270, but which were to be included in the January sale priced at £7,110.

5. Cash sales include £1,400 from the sale of Chippendale's private car which had been wrongly paid into the business bank account.

6. No entry had been made for part-time wages amounting to £3,650 paid out of the shop takings.

7. General expenses unpaid at 31 December 2000 amounted to £4,470. This amount included debits of £1,320 in respect of insurance, of which £408 relates to 2000.

8. The firm's bank statement shows an overdraft of £4,975; the discrepancy of £1,544 represents interest charged on 31 December 2000 which had been omitted in the firm's ledger.

9. The loan interest for 2000 had not been paid.

10. Vans are to be depreciated at 20% of cost, and shop fittings at 10% of net book value.

REQUIRED:

Financial statements for Chippendale's furniture shop for the year ended 31 December 2000, consisting of profit & loss account and balance sheet, using the trial balance and the additional information supplied.

52


CHIPPENDALE FURNITURE SHOP : SUGGESTED SOLUTION

There are a number of different approaches that can be adopted to answer this question; probably the most straightforward is to open up 'T' accounts to represent all the ledger accounts and then make the necessary adjustments.

1. The proceeds from the sale of the adjoining shop have been credited to the freehold property account. This error must be corrected by opening a 'profit on sale of fixed' asset account.So, cost of building still owned = £55,000. Profit on building sold = 127,500 – 55,000 = £72,500.

2. The trade debtors account must be reconstructed; the balancing figure will be the credit sales for the year, which will be credited to that account.

3. Similar procedure to above.

4. A trading account should be opened and the opening stock, purchases and closing entered. This will result in the stock account containing the stock at 31 December 2000. The closing stock value must be reduced by £2160, i.e. writing down the stock to NRV (£9,270 – £7,100).

5 & 6. These errors need to be corrected.

7. Note that there is an accrual and a prepayment for insurances.

8 – 10. These are 'year-end adjustments' which must be put through.

(1) Calculation of Sales: Credit Sales

Opening debtors 7,817 üCash received (32,870) ü £39,951 : credit salesClosing debtors (14,898) þCash sales 254,451 + 3,650 – 1,400 = £256,701

DR. CR. OR CR.

Opening debtors 7,817 Cash received 32,870 Cash received 32,870\ Credit sales

(missing figure)

39,951Closing debtors 14,898 Bad debts w/off

Closing debtors832

14,066

___________________ ___________________ ___________________

47,768 47,768 47,768___________________ ___________________ ___________________

(2) Purchases

Opening creditors (14,712) üPayments 185,298 ÷ £188,588Closing creditors 18,002 þCOGS = 32,832 + 188,588 –

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CHIPPENDALE FURNITURE SHOP

PROFIT AND LOSS ACCOUNT for the year ended 31 December 2000£ £

Sales (£256,710 + £39,951) 296,652Cost of sales (174,129)

________________________

Gross profit 122,523Profit on sale of fixed assets (127,500 – 55,000) 72,500

________________________

195,023Less expenses:

General expenses 37,146 + 4,470 – 408 41,208Wages 42,183 + 3,650 45,833Depreciation 4,160 + 1,210 5,370Bad debts 832 + (437 – 367) 902Interest 1,800 + 1,544 3,344

___________________

(96,657)________________________

Profit for year 98,366Capital brought forward 22,035Drawings (21,200)

________________________

Capital carried forward 99,201________________________

BALANCE SHEET at 31 December 2000

£ £ £FIXED ASSETS cost depreciation

Freehold property 55,000 –Vans 20,800 7,870Shop fittings 16,300 5,410

___________________ ___________________

92,100 13,280 78,820CURRENT ASSETS

Stocks 47,291Debtors 14,066Less provision for doubtful debtors (437)

___________________

13,629Prepayments 408Cash 300

___________________

61,628___________________

CURRENT LIABILITIES

Trade creditors 18,002Accruals 6,270Bank overdraft 4,975

___________________

29,247___________________

NET CURRENT ASSETS 32,381LOAN (12,000)

___________________

99,201___________________

CAPITAL ACCOUNT 99,201___________________

54


LECTURE 8

TEST

55


LECTURE 9

WORKING CAPITAL CONTROL

Why is it important?

working capital is cash tied up in the day-to-day operations of the businessthe business cannot continue without working capitalit has to be funded from somewhereif the business runs out of cash, it will fail

Cash requirements need to be anticipated so that the business can arrange additional finance if necessary. Cash inflows and outflows are forecasted in a cash budget.

Proforma cash flow budgets/forecasts:

Jan Feb Mar Apr May Jun Total£ £ £ £ £ £ £

Inflowse.g. Capital Sales

AOutflowse.g. Purchase of Fixed Assets Purchases of Stock Wages Rentetc.

B

Net cash flow A-B=CCash b/f D ECash c/f C+D=E

To keep working capital to a minimum (and hence free up cash for other purposes, such as expansion of fixed assets or reducing debt), can: keep stocks low (risk of stockouts causing business loss) keep debtors low (encourage them to pay quickly with prompt payment discounts,

run credit checks before selling on credit, risk of becoming uncompetitive) delay payment to creditors (risk of losing supplier goodwill)

BUT, if working capital is too low (or negative) then business may not be able to meet current liabilities as they fall due (risk of bankruptcy).

56


Lecture example 8: Carruthers & Co. Ltd

Carruthers & Co is formed with share capital £40,000 of which it invests £25,000 in fixed assets, plant and machinery, etc., and the remainder it leaves as cash £15,000. Its plans for the first 6 months are as follows and you are asked to produce:

1. a monthly cash flow forecast for the 6 months;2. a profit and loss statement for the 6 months; and3. a balance sheet as at the close of the 6 months period.

Sales for 6 months £600,000Materials in sales £240,000Labour in sales £180,000Other expenses including depreciation of £2,000 £140,000Materials purchased for the period £260,000

Timing of cash receipts and payments for 6 months:

Sales Payments OverheadsReceipts Materials & Wages £ £

July 40,000 60,000

August 50,000 60,000 All paid

September 50,000 20,000 evenly

October 70,000 20,000 each

November 120,000 20,000 month

December 150,000 20,000___________________ __________________

480,000 200,000___________________ __________________

57


CARRUTHERS & CO – SUGGESTED SOLUTION

Opening Balance Sheet

£Fixed assets 25,000

Current assets Cash at bank 15,000

_______________

40,000_______________

£ Share capital 40,000

_______________

Cash Flow Budget

Receipts July August September October November December

SalesShare capital

£ 40,00040,000

£ 50,000

-

£ 50,000

-

£ 70,000

-

£ 120,000

-

£ 150,000

-

Sub Total A 80,000 50,000 50,000 70,000 120,000 150,000

Payments

MaterialsWagesOverheadsFixed assets

60,00030,00023,00025,000

60,00030,00023,000

–

20,00030,00023,000

–

20,00030,00023,000

–

20,00030,00023,000

–

20,00030,00023,000

–

Sub Total B 138,000 113,000 73,000 73,000 73,000 73,000

Balance (A–B)Balance b/fwdBalance c/fwd

(58,000)–

(58,000)

(63,000)(58,000)

(121,000)

(23,000)(121,000)(144,000)

(3,000)(144,000)(147,000)

47,000(147,000)(100,000)

77,000(100,000)(23,000)

58


Profit & Loss Account for the 6 months to 31 December

£ £Sales 600,000Less: Materials in sales 240,000

Labour 180,000Overheads 140,000

___________________

(560,000)___________________

Retained profits 40,000___________________

Closing Balance Sheet as at 31 December

£ £Fixed assets (25,000 – 2,000) 23,000

Current assets

Stocks (260 –240)000 20,000 Debtors (600 – 480)000 120,000

_________________

140,000_________________

Current liabilities

Creditors (260 – 200)000 60,000 Overdraft 23,000

_________________

83,000_________________

Working capital 57,000_________________

80,000_________________

Share capital 40,000Retained profits 40,000

_________________

80,000_________________

59


BANK RECONCILIATIONS

At the end of November the balance on your bank statement was £351.05.

From the cash book you note that the last cheque issued was number 261 and that the balance shown at 30 November was £319.04.

On examining your bank statement you find the following:

(a) 3 cheques that had been issued have not yet appeared on the statement:

261 £16.51259 £127.50251 £96.60

(b) A deposit (banking) of £217.60 that was made on 29 November has not appeared on the statement.

(c) A cheque for £323.50 has been banked but appears on the statement as £332.50.

Bank reconciliation as at 30 November £

Balance per bank statement 351.05

Less: outstanding cheques261 16.51259 127.50251 96.60

-------- (240.61)---------- 110.44

Add: outstanding deposit 217.60Less: error on statement (9.00)

----------Balance per cash book 319.04

----------

60


Lecture example 9: Daphne Ltd part (a)

Daphne Ltd’s book-keeper has not yet reconciled the cash book balance of £1,405 at 30.6.X1 to the balance shown on the bank statement at that date, which is £4,020 in the company's favour. Investment income of £800 shown on the statement has not been entered in the company's books, neither have bank charges of £350 or a standing order for advertising of £415.

Cheques outstanding at 30.6.X1 totalled £13,500 and lodgements (deposits) not yet credited on the statement amounted to £10,920. All of these items related to the year ended 30 June 20X1.

Daphne Ltd: suggested solution part (a)

(a) CASH BOOK

Balance per TB 1,405 Bank charges 350

Investment income 800 Standing order 415Amended balance 1,440

-------- --------£2,205 £2,205

BANK RECONCILIATION £Balance per statement (30.6.X1) 4,020

Add: deposits not yet credited 10,920--------14,940

Less: cheques not yet presented (13,500)--------

Amended balance per cash book £ 1,440

61


62


RATIOS

Ratios are used for detailed analysis of the position and performance of a business, using the accounts of the business.

Ratios should never be used by themselves – need to look at trends (comparisons over time) or compare to budget or external yardsticks (eg industry averages).

There are four categories:

1. Profitability Ratios

Allow examination and comparison of profitability trends.

Gross Profit Ratio = Gross Profit 100% Sales

Net Profit Ratio = Net Profit Before Interest and Tax 100% Sales

Return on Capital Employed = Net Profit Before Interest and Tax 100%(ROCE) Capital Employed

Note: Capital Employed = Long-Term Liabilities + Capital + Reserves

ROCE is very important, and can be split down further:

ROCE = Net Profit Ratio Capital Turnover Ratio

Where the Capital Turnover Ratio = Sales . Capital Employed

63


2. Liquidity Ratios

Identify short-term financial stability by analysing working capital.

Stock Turnover Ratio = Cost of Sales (no. of times)Inventory Held

OR

Inventory Held 365 days (no. of days) Cost of Sales

Note: Inventory held could be the year end value of stock OR the average stock holding over the year (i.e. (opening stock + closing stock)/2).

Quick Stock Turnover (high no. of times, low no. of days) use Current Ratio; Slow Stock Turnover use Quick Ratio:

Current Ratio = Current Assets . Current Liabilities

Quick Ratio (Acid Test) = Current Assets – Stock Current Liabilities

Debtor Collection Period = Trade Debtors 365 daysTotal Credit Sales

Creditor Payment Period = Trade Creditors 365 daysTotal Credit Purchases

Note: Debtors and Creditors can be either the year end balances OR the average balance over the year.

3. Efficiency Ratios

Examine the sales generated by the asstes employed in a business.

We have already seen the Capital Turnover Ratio – other ratios include:

Fixed Assets Turnover Ratio = Sales . Fixed Assets at Book Value

64


4. Investment Ratios

Allow assessment of the business from the point of view of an investor (eg shareholder or lender).

Gearing (Leverage) Ratios:

Debt to Equity = Long-Term Liabilities Capital + Reserves

Debt to Capital Employed = Long-Term Liabilities Capital Employed

Investor Ratios:

Dividend Yield = Dividend Per Share 100%Market Price per Share

Note: You need market price to calculate this – it may not be available.

Dividend Cover = Net Profit Before Ordinary Dividends (no. of times)Ordinary Dividends paid and proposed

Interest Cover = Earnings Before Interest (no. of times) Annual Interest Charge

Earnings per Share = Earnings Before Ordinary Dividends Number of Ordinary Shares Issued

Price Earnings Ratio= Market Price per Share(PE Ratio) Earnings per Share

65


WRITING REPORTS

The tutorial work on ratio analysis is required in the form of a report. You may not have prepared a ‘professional’ style report before, so here are a few pointers.

The report should contain the following:

1. Title page (title of report, date, possibly the author)

2. Contents page (headings of the following sections, with page references)

3. Executive summary (brief summary of scope of report and main findings, imagine you are writing for a busy chief executive)

4. Terms of reference (restate the requirements for the report, possibly mention your methodology e.g. ‘using ratio analysis’)

5. Introduction (could contain background information on the company analysed, should split into several sub-sections if necessary)

6. Several separate sections for e.g. overview of financial performance and position (e.g. the company’s profits have grown at a rate of 5% over the past 5 years but the company has been losing cash, 50% of sales are made in Europe, etc.), discussion of profitability, working capital, etc. ratios. Refer to calculated ratio figures where appropriate, BUT DO NOT INCLUDE ACTUAL CALCULATIONS HERE.

7. Conclusion (of main findings - do NOT put anything new in your conclusion)

8. Appendices (containing your ratio - and any other - calculations)

You should aim to calculate a couple of ratios in each category, but you need not be limited to this. ALWAYS CALCULATE RATIOS FOR MORE THAN ONE YEAR - it is important to be able to compare ratios against something!

Do not be afraid of using sources like the financial times (searchable via CD-ROM in the library) or the internet to find out background information on the company to include in your report. Make sure you have a good read of the whole set of financial statements provided for you - if any pages are missing it is because the notes contained in those pages would probably confuse you and you shouldn’t need to be using them - including the directors’ report which often gives you useful background information.

Use CONSOLIDATED figures where applicable - these are for the whole group of companies not just the individual parent holding company. YOU DO NOT NEED TO KNOW HOW TO CALCULATE THE CONSOLIDATED FIGURES YOURSELF.

66


REVISION LECTURE - TACKLING EXAM-STYLE QUESTIONS

DAPHNE LIMITED

The book-keeper of Daphne Ltd, a manufacturing company, has prepared a profit and loss account for the year to 30 June 20X1. His trial balance shows the following items:

£

Land and buildings (cost 1.7.X0) 60,000Amortisation of leasehold property (1.7.X0) 45,000Plant and machinery (cost 1.7.X0) 60,000Depreciation on plant and machinery(1.7.X0) 24,000Motor vehicles (cost 1.7.X0) 12,000Depreciation on motor vehicles (1.7.X0) 10,000Stocks (30.6.X1) 40,000Debtors 22,500Creditors and accruals 25,000Cash at bank (per cash book) 1,405Profit and loss account (1.7.X0) 32,500Draft profit for the year 46,405"Suspense account" 125,000Ordinary shares of 50p (fully paid) 150,000Investment (at cost) 12,000

You ascertain the following facts:

1. The book-keeper has not yet reconciled the cash book balance at 30.6.X1 to the balance shown on the bank statement at that date, which is £4,020 in the company's favour. Investment income of £800 shown on the statement has not been entered in the company's books, neither have bank charges of £350 or a standing order for advertising of £415.

Cheques outstanding at 30.6.X1 totalled £13,500 and lodgements (deposits) not yet credited on the statement amounted to £10,920. All of these items related to the year ended 30 June 20X1.

2. The balance on the "suspense account" is made up thus:£ £

Purchase of freehold land Proceeds from sale of and buildings 100,000 motor vehicle 1,000Purchase of motor vehicles 10,000Purchase of new plant 15,000Interim payment of

employees' bonus 1,000 Balance c/d 125,000––––––––––––––––––––– ––––––––––––––––––––

126,000 126,000––––––––––––––––––––– –––––––––––––––––––––

All transactions took place in the year to 30.6.X1.

67


3. The value of the building bought during the year was £40,000 and it has an estimated useful life of 20 years. The company's other premises were acquired under a 20-year lease.

4. The plants uses a 'straight-line method' of depreciation. Plant and machinery are depreciated over ten years and no items are fully depreciated.

5. Motor vehicles are depreciated over four years. At the beginning of the year the company owned four vehicles, shown in the books as follows:

Vehicle No: Cost Depreciation

£ £1 2,000 2,000

2 2,000 2,0003 4,000 4,0004 4,000 2,000

––––––––––––––––––– –––––––––––––––––––

12,000 10,000––––––––––––––––––– –––––––––––––––––––

During the year vehicle no. 1 was sold for £1,000.

6. It is thought that debts totalling £500 are irrecoverable. A provision of 2% is to be made on the remaining debts.

7. The directors are recommending the payment of a dividend of 4p per share.

8. It is intended that the company's employees receive a total bonus of 5% of the net profit (before deduction of the bonus).

9. The draft profit was calculated before adjustments for the following payments:Electricity 1.4.01 – 30.6.X1 (paid July) £710

Rates 1.4.01 – 30.9.X1 (paid June) £420

You are required to:

(a) make any necessary adjustments to the cash book balance as at 30.6.X1 and prepare a bank reconciliation as at that date; and

(b) prepare an adjusted profit and loss account for the year ended 30.6.X1 and a balance sheet as at that date in vertical format.

HINTS:

This is a difficult and quite long question. DO NOT PANIC!! Deal with each of the adjustments separately and do not expect to get everything right. Start off with a trial balance and then do your bank reconciliation. Start your final accounts on new sheets of paper and write them out neatly, to make sure you get all of the "easier marks".

68


DAPHNE LIMITED: SUGGESTED SOLUTION

(a) CASH BOOK

Balance per TB 1,405 Bank charges 350

Investment income 800 Standing order 415Amended balance 1,440

-------- ----£2,205 £2,205

BANK RECONCILIATION £Balance per statement (30.6.X1) 4,020

Add: deposits not yet credited 10,920--------14,940

Less: cheques not yet presented (13,500)--------

£ 1,440

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(b) DAPHNE LIMITED

ADJUSTED PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 30.6.X1£ £

Draft profit 46,405

Add: Investment income 800Profit on disposal of MV (W) 1,000Prepayment of rates 210

_____2,010

--------48,415

Less: Depreciation (W) 16,000Bad debt written off 500Doubtful debts provision (W) 440Advertising 415Bank charges 350Electricity accrual 710

_____

(18,415)---------

Net profit c/d £30,000

Less: Employees' bonus (W) (1,500)--------

28,500Less: Proposed dividend (W) (12,000)

---------

Retained profit for the year £16,500=====

70


DAPHNE LIMITED BALANCE SHEET AS AT 30.6.X1£ £ £

Cost Depn NBVFIXED ASSETS

Tangible assets

Freehold land and buildings 100,000 2,000 98,000

Leasehold land and buildings 60,000 48,000 12,000 Plant and machinery 75,000 31,500 43,500 Motor vehicles 20,000 11,500 8,500

_____________________ -------

255,000 93,000 162,000Investments 12,000

------174,000

CURRENT ASSETS

Stock 40,000

Debtors and prepayments 22,210Less provision (440)

_______21,770

Cash at bank 1,440----------

63,210

CREDITORS: AMOUNTS FALLING DUE WITHIN

ONE YEAR

Creditors and accruals 25,710

Proposed dividend 12,000Employees' bonus 500

---------- ----------38,210

NET CURRENT ASSETS 25,000----------

£199,000----------

CAPITAL AND RESERVES

Share capital: Fully paid 50p shares 150,000

Profit and loss account 49,000----------

£199,000----------

71


DAPHNE:

WORKINGS

(i) Depreciation £

Freehold building = 2,000

Leasehold building60 000

20

,= 3,000

Plant and machinery60 000 15 000

10

, ,= 7,500

Motor vehicles4 000 10 000

4

, ,= 3,500

` ______(NB: Two of the remaining vehicles are already fully depreciated) £16,000

______

(ii) Profit on disposal of MV £Sale proceeds 1,000

Less: NBV (at 1.7.X0) nil_____

Profit on disposal £1,000_____

(iii) Employees' bonus £5% x net profit £30,000 = 1,500

Less: Interim payment (suspense account) 1,000_____

Accrued in final accounts £ 500_____

(iv) Proposed dividend4p x 300,000 shares £12,000

______

(v) Provision for doubtful debts2% x (22,500 – 500) = £ 440

72


BASIL BRUSH

Basil Brush is a sole trader who keeps a simple set of double entry accounting records. During the year ended 31 March 20X1 these records were kept correctly and a trial balance from the ledger balanced. Basil Brush has attempted to prepare a set of accounts from his ledger and the result is set out below; clearly the accounts are not correct!

Profit & Loss Account for the year to 31 March 20X1£ £

Stock, 31 March 20X0 1,500 Sales 35,150Purchases 30,000 Discounts allowed 730Rent paid 360 Less Discounts received 450 280New motor vans, purchases Loan from A. Fox 490 1 January 2000 at cost 1,200Wages 2,240General expenses 320Bad debts written off 420Provision for bad debts, 31 March 20X0 100 Net loss for the year 220

£36.140 £36.140

Balance Sheet as at 31 March 20X1£ £

Capital account, Freehold property 5,000 31 March 20X0 6,778 Furniture and fittingsTrade creditors 3,080 cost at 31 March 20X0 1,020Bank overdraft 1,870 Motor vans, cost at

31 March 20X0 600Provision for depreciation Drawings 1,400 31 March 20X0: Trade debtors 3,350

Furniture & fittings 102Motor vans 120

£11,950 £11.370

REQUIRED

A redrafted Profit & Loss Account for the year to 31 March 20X1 and a Balance Sheet on that date, in the form in which they should, in your opinion, have been prepared.

You should take into account the following additional information:

(a) Depreciation charges for the year should be calculated as follows:

Furniture and fittings 10 per cent of cost

73


Motor vans at an annual rate of 20 per cent of cost.

(b) The bad debts provision at the end of the year to 31 March 20X1 should represent 10 per cent of the Trade Debtors figure.

(c) Interest on the loan from A. Fox should be provided at a rate of 10 per cent per annum. No interest for the year was paid in the period under review. The loan was raised on 1 April 20X0.

(d) It is discovered that a credit sale for £300 made in February 20X1 has not been entered in Brush's books.

(e) The closing stocks at 31 March 20X1 have been valued at £2,000.

(f) Rent paid, as recorded in the ledger, relates to 9 months, thus one quarter's rent was owing at 31 March 20X1.

74


BASIL BRUSH : SOLUTION NOTES

Reconstructed Trial Balance - at 31 March 20X1

Dr Cr£ £

Stock, 1 April 20X0 1,500Flurchases 30,000Rent paid 360New motor vans 1,200Wages 2,240General expenses 320Bad debts written off 420Provision for bad debts, 1 April 20X0 100Sales 35,150Discounts allowed 730Discounts received 450Loan from A. Fox 490Capital account - B. Brush : 1 April 20X0 6,778Trade creditors 3,080Bank overdraft 1,870Freehold property 5,000Furniture & fittings, 1 April 20X0 1,020Motor vehicles, 1 April 20X0 600Drawings 1,400Trade debtors 3,350Provision for Depreciation - 31 March 20X0

- Furniture & fittings 102- Motor vans 120

£48,140 £48,140

Adjustments

(a) Depreciation: Furniture & fittings Dr Dep. exp. (P&L) 102 Cr F&F A/C (BS)102 Motor vans – old Dr " " 120 Cr MV A/C (BS)120

– new - ¼ yr Dr " " 60 Cr " "60

(b) Bad Debts Provision Dr Bad Debts exp (P8L)(increase only) 265 Cr Prov A/C (BS)

265

(c) Interest on Loan Dr Interest (P&L) 49 Cr Creditors (BS) 49

(d) Credit Sale Adjustment Dr Trade Debtors (BS) 300 Cr Sales (P&L) 300

75


(e) Closing Stocks Dr Stock AC (BS) 2,000 Cr Trading A/C (P8L) 2,000

(f) Rent accrual Dr Rent paid (P&L) 120 Cr Creditors (BS) 120

76


BASIL BRUSHProfit & Loss Account for the year ended 31 March 20X1

£ £Sales 35,450 Opening stock 1,500 Purchases 30,000

________________

35,000 Closing stock (2,000)

________________

Cost of Sales (29,500)________________

Gross Profit 5,950Other income - discounts receivable 450Less expenses: Wages 2,240 Rent 480 General expenses 320 Bad debts 685 Depreciation:M.V. 180

F & F 102 Interest 49 Discounts allowed 730

________________

(4,786)________________

Net Profit for Year 1,614________________

77


Balance Sheet as at 31 March 20X1

Cost Depn.£ £ £

Fixed Assets Freehold property 5,000 – 5,000 Furniture & fittings 1,020 204 816 Motor vans 1,800 300 1,500

_____________

7,316Current Assets Stocks 2,000 Trade debtors less provision 3,285

_____________

5,285_____________

Creditors: amounts due within one year Trade creditors 3,080 Other creditors 169 Bank overdraft 1,870

_____________

5,119_____________

Net Current Assets 166Creditors: amounts due after more than one year Loan (490)

_____________

6,992_____________

Capital Account Opening balance 6,778 Profit for year 1,614 Less Drawings (1,400) 214

_____________ _____________

Closing Balance 6,992_____________

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