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Pepe's Financial Statement PDF
Pepe's Financial Statement PDF
Pepe's Financial Statement PDF
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from http://www.bized.co.uk/learn/business/accounting/busaccounts/pizza/jan4.htm
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This is calculated in the Trading Account and is the excess of sales over the cost of goods
sold during the period.
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This is calculated in the Profit and Loss Account and is what remains after all other costs
used up in the period have been deducted from the Gross Profit.
It is now usual for the trading and the Profit and Loss accounts to be shown under one
combined heading, The Trading Account being the top section and the Profit and Loss account
being the lower section.
It would be unusual for a trader to have sold all the goods at any particular date. So in most
cases there would be stock in hand at the end of the trading period. So it is normal practice for
this stock to be counted and valued at the price for which it could be sold. The figure for this is
normally called the closing stock and the details are given as a note at the end of the 7ULDO
%DODQFH. This amount is in fact entered as a debit in a new account called the Stock account,
The Trading Account also shows any items of expenditure which can properly be allocated to
expenses connected with the purchase, manufacture or stage of goods, i.e. rent of warehouse,
wages of store men, carriage inwards, etc.
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purchases figure.
&DUULDJH2XWZDUGV - Is the cost of transport of goods out of the firm to its customers, it is not
part of the firm’s expenses in buying the goods and is always entered in the Profit and Loss
Account as an expense not the Trading Account.
Pepe’s Pizza Accounts Page 2 di 16
'HSUHFLDWLRQ - This is discussed later, but generally the provision for depreciation for the
accounting period is considered an expense to the business is entered on the Profit and Loss
Account. ( The total depreciation of the asset is taken account of on the Balance Sheet).
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For the purposes of this exercise we will be using the vertical format, as this is most widely used
in all types of businesses and its form of presentation makes comparisons with other years
easier.
To recap:
)L[HGDVVHWV are the more or less permanent assets of the business. They are not normally for
resale, e.g. premises, motor vehicles, fixtures and fittings, equipment and furniture.
&XUUHQWDVVHWV are the types of assets used for trading purposes. These assets are usually
more liquid than the fixes assets. In other words they are more readily converted into cash. They
include cash, bank, debtors and stock.
months. These include trade creditors, bank overdrafts, and short-term loans that are repayable
within 12 months.
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Capital represents what is known as " WKHQHWZRUWK" of the owner(s). It is the difference
between the assets and the liabilities. In the Balance Sheet it is listed under the ")LQDQFHG%\
section. It includes capital introduced into the business, (which could be personally from the
owners if a sole trader or partnership, or from the shareholders if a limited company), the net
profit for the accounting period, less any owners drawings.
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Premises
Equipment
Machinery
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Stock
Debtors
Bank
Petty Cash
/(66&855(17/,$%,/,7,(6
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Bank Overdraft
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capital
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Pepe’s Pizza Accounts Page 5 di 16
),;('$66(76
Premises 100,000
Equipment 8,000
Machinery -------
Motor Vehicle 20,000 128,000
&855(17$66(76
Stock 5,500
Debtors 7,600
Bank ----
Petty Cash 200 13,300
/(66&855(17/,$%,/,7,(6
Creditors 5,000
Bank Overdraft 2,000 (7,000) 6,300
&$3,7$/(03/2<(' 134,300
less mortgage 70,000
),1$1&('%<
FDSLWDO 53,000
QHWSURILW 19,300 72,300
OHVVGUDZLQJV (8,000)
However for most businesses there is an item called '(35(&,$7,21 that has to be accounted
for. Lets see how this would affect both the Trading & Profit and Loss Account as well as the
Balance Sheet.
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Fixed assets are those assets of the business that have a long life, are used in the business and
are not for re-sale or for conversion to cash, e.g. motor vehicles, machinery, buildings, land,
office equipment, etc.
However, usually, except for land, most fixed assets have a limited number of years of useful
life.
Depreciation can be defined, in its simplest terms, as the difference between the original cost of
the asset and the amount received when the asset is sold, for example, if Pepe buys a motor
vehicle for £ 20,000 and then sells it for £ 8,000, then the total depreciation is £ 12,000.
If an asset is bought and sold within one accounting period, (normally one trading year) then the
depreciation can be accounted for within one accounting period.
However difficulties arise because most assets are used for more than one accounting period.
Pepe is planning to keep his vehicle for four years.
Pepe’s Pizza Accounts Page 6 di 16
In this instance there are two main methods of calculating the SURYLVLRQIRUGHSUHFLDWLRQ
VWUDLJKW OLQH and UHGXFLQJEDODQFH. The choice of which method to use depends upon whether
the main value to the business of the asset is gained evenly throughout the life of the asset or
whether it is gained mainly in the early years of the asset when it is newer and the repairs and
maintenance costs are lowest.
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This allows an HTXDO amount to be charged as depreciation for each year of the expected use of
the asset. The basic formula is:
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'(35(&,$7,21
In Pepe’s case, he paid £ 20,000 for a motor vehicle. He expects to use it for four years before
he replaces it. He estimates that when he sells it in four years time he will get £ 8,000 for it. So,
for Pepe, the calculation for the provision for depreciation would be:
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The figures from which to calculate the depreciation are normally given as a note at the end of
the Trial Balance. This means that within the accounts there must be both a credit and debit
entry. So the Provision for depreciation )257+$7<($5 is added as an expense on the
Trading & Profit & Loss Account.
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This is the revised TRADING and PROFIT & LOSS account, including the PROVISION FOR DEPRECIATION,
calculated using the Straight-Line Method.
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Pepe’s Pizza Accounts Page 7 di 16
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OLQH0HWKRGRIFDOFXODWLQJ'HSUHFLDWLRQ
cost GHSUHFLDWLRQ
Stock 5,500
Debtors 7,600
Bank ----
Petty Cash 200 13.300
/(66&855(17/,$%,/,7,(6
Creditors 5,000
Bank Overdraft 2,000 (7,000) 6,300
&$3,7$/(03/2<(' 131,300
less mortgage 70,000
£ 61,300
),1$1&('%<
capital 53,000
net profit 16,300 69,300
less drawings (8,000)
£ 61,300
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This method calculates the Provision for Depreciation annually on the balance of the asset from
the previous year. It is normal for the percentage to be used to be specified in the notes at the
end of the Trial Balance.
This method is particularly useful for assets where the repair and maintenance costs increase as
the asset gets older, for example on a motor vehicle. By reducing the Provision for Depreciation
as the repair and maintenance cost rise, means that the total usage costs each year are kept
fairly constant.
So, if Pepe’s Accountant recommends using the Reducing Balance Method for calculating the
Provision for Depreciation for his motor vehicle, assuming 20%, the figures would be:
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DVVHWYDOXHDWWKHHQGRI\HDU
<($5 DVVHWYDOXHDWWKHHQGRI\HDU
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Pepe’s Pizza Accounts Page 8 di 16
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Pepe’s Pizza Accounts Page 9 di 16
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cost GHSUHFLDWLRQ
Stock 5,500
Debtors 7,600
Bank ----
Petty Cash 200 13.300
/(66&855(17/,$%,/,7,(6
Creditors 5,000
Bank Overdraft 2,000 7,000 6,300
&$3,7$/(03/2<(' 130,300
less mortgage 70,000
£ 60,300
),1$1&('%<
capital 53,000
net profit 15,300 68,300
less drawings (8,000)
£ 60,300
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Once the accounts have been done, and are ready to be published. A number of people might
want to compare them with other companies operating in the same financial sector. How do they
do this?
Try some out! Have a go with the figures from Pepe’s Pizza Parlour.
Profitability
How successful a company is depends upon its profitability. The key ways in which we work out
these are called the 5HWXUQRQ&DSLWDO(PSOR\HG and the *URVVDQG1HW3URILW0DUJLQV
This is expressed in percentage terms and is often called "return on owner's equity". It
represents the profit earned from the money invested in the business by it's owner. It can be
worked out by the following equation:
So a company generating a net profit of £250,000 before deduction of interest and tax which has
an opening balance on it's capital account £1M would have a Return on Capital of 25%.
These are the most commonly used profitability ratios. They express the comparison between
sales and profit in percentage terms, and are worked out by the following equations:
So, if the company which generated a net profit of £250.000 had achieved sales of £750.000 the
profit margin would be 33%.
Solvency
The solvency or liquidity of a company tells us whether a company can pay its debts. We work
how solvent companies are by using the /LTXLGLW\5DWLRV
/LTXLGDVVHWV&XUUHQWOLDELOLWLHV
Liquid assets are those assets which can be turned into cash quickly such as debtors, cash and
short term investments such as bank deposits. Stock is QRW considered a liquid asset. Current
liabilities are those liabilities which must be paid shortly such as creditors DQG bank overdrafts. A
bank overdrafts is considered to be a current liability because it can be recalled without notice.
The ideal ratio should be around 1:1.
If, for example, a company had liquid assets of £60,000, and debts of £40,000 the ratio would
be:
Expressed as
Pepe’s Pizza Accounts Page 11 di 16
This means that the company has more assets ( than liabilities (1). This company is solvent
but may not be managing it’s money very well.
If the figures were reversed then the ratio would change as follows:
Expressed as
This would mean that the company is in serious trouble since it would not have sufficient funds
to meet its liabilities.
This is the other test of a companies liquidity. It takes a longer term view of the company’s
position since unlike the Acid test it includes stock and work in progress ( this is termed &XUUHQW
DVVHWV). This is due to the fact that it is deemed that both of these will at sometime be turned
into debts and eventually into cash. The ratio is worked out as follows:
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therefore a company with current assets of £80,000 with the current liabilities of £40,000 would
equate as follows:
There is no "ideal" ratio but a figure of 2:1 is often quoted. Most businesses operate with a ratio
lower than this but it is important to maintain a healthy figure because bank overdrafts can in
theory be recalled without notice at any time.
Performance
These ratios provide information on how well a business is being run.
Businesses try to have as high a rate of stock turnover as possible. The rates can be expressed
in two ways.
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This tells a business how long on average an item remains in stock. The figure can be
expressed in terms of months, weeks or days. For Pepe's Pizza Parlour, this would result in the
following:
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Pepe’s Pizza Accounts Page 12 di 16
This tells a business how many times in each year the stock rotates. For Pepe’s Pizza Parlour,
this would result in the following:
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Note! In both cases the average stock can be calculated from the Trading and Profit and Loss
account by:
2SHQLQJVWRFN&ORVLQJVWRFN
Most businesses sell goods on credit. Credit is usually given for periods of 30, 60 or 90 days. No
business wishes to extend the credit period given and so it is important to monitor just how long
customers are taking to pay for credit sales. The following ratio can be used:
'HEWRUV$YHUDJHGDLO\VDOHV6DOHVGLYLGHGE\
It is important for a business to monitor how long it takes to pay it’s creditors. Persistent late
payment may result in a supplier cutting off credit facilities! The following ratio can be used:
&UHGLWRUV$YHUDJHGDLO\SXUFKDVHV3XUFKDVHVGLYLGHGE\
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Therefore a company with interest payments of £35,000 whilst earning £50,000 would have the
following gearing ratio:
This company would be susceptible to changes in the interest rate. Whereas a company with a
gearing ratio of 40% could absorb any increases in the interest rate with greater ease.
A Test paper based upon these ratios is available. (You will need to print off a copy of Pepe's
Trading and profit and Loss Account and Pepe's Balance Sheet if you wish to do this test paper)
Pepe’s Pizza Accounts Page 13 di 16
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