2001, 6

(a) The Bank can use information contained in the business’ financial statements when

deciding whether to lend the sum of money requested in the following ways:

1. Before lenders will grant a business loan, they need to ensure that the loan will be

repaid. Every loan is a risk but banks want to take as little risk as possible.

2. When deciding whether or not to issue a loan, lenders may look at gross annual sales

or revenues, checking account balances, profitability, monthly cash flow projections

for up to five (5) years, a schedule of current debts and loan balances, payment

schedules, maturity and available collateral.

(b) The capital market is also called the securities market. It refers to those financial

markets for the buying and selling of long-term debt-backed or equity-backed

securities. These markets channel the wealth of savers to those who can put it to long-

term productive use, such as companies or governments making long-term

investments. It includes the stock market and the bonds market.

(c) An assessment of the importance of the capital market for an expanding company

such as Precious Foods Limited now follows:

1. One of the major economic problems facing the Caribbean is the lack of capital for

businesses. Many businesses cannot realise their fullest potential because they lack

the capital to conduct research, develop their products and their markets, automate

their industries, etc. They need greater access to capital markets as a possible source

of funding in order for them to be able to compete on a global playing field.

2. Globalisation has provided greater access to the world’s capital markets. This means

that Caribbean-based firms like Precious Foods Limited can source capital from
 capital markets, both within and outside of the Caribbean region. Greater access to

capital will mean greater opportunity, growth and expansion.

3. Sometimes a business is unable to access loans from commercial banks, etc. because

it may be already heavily indebted (highly geared). Also, it may prefer equity

financing over debt financing for strategic purposes. In such situations, they may turn

to the capital market (selling shares) for funding.

4. Precious Foods Limited can decide to go public (if it isn’t already a public limited

liability company) and get itself listed on various Stock Exchanges in the Caribbean

and elsewhere. This will afford it the opportunity to sell its shares (equity-financing)

which will raise capital for its desired expansion. A company can also issue bonds for

sale. Bond holders will become creditors to the business (debt-financing). The funds

raised from the sale of bonds will be used for its expansion.
S2002, 5

(a) The advantages of debt financing to a firm include:

1. There is no dilution of ownership – the person/business funding the business becomes

creditors to the businesses, not owners. This means that the existing shareholders

retain control of their business.

2. It is usually cheaper to access debt financing than equity financing (going public:

administrative costs of getting listed on the stock exchange, issuing the prospectus,

printing certificates, advertising, legal fees, etc. are usually very costly).

3. When the debt gets repaid, the liabilities of the business are restored to the pre-loan

levels.

4. Interest (which is an expense) is paid before company tax is calculated thereby

reducing the amount of taxes paid.

5. The gearing of the company increases with debt financing and this puts the business

in a somewhat risky position, however, a highly geared firm (ratio of debt to equity is

high) may lead to higher future returns to shareholders (high risks – high rewards).

6. Debt financing is considered to be quite flexible since loans principals can be

increased as needed and loans can be repaid faster once the business is able to afford

to do so.

(b) Three possible internal sources of funds for expansion and a discussion on the relative

merits of financing the remainder by either equity or debt methods now follows:

Internal sources of funds may include:

1. Retained Profits – profits not distributed as dividends or paid out as taxes can be

retained and reinvested in the business for expansion purposes. These funds represent

a permanent source of finance for the business.

2. Sale of Assets – assets that are not being fully used by a business (unproductive

assets) can be sold and the money earned from its sale can be used for expansionary

projects. Also, assets which the firm do not need to own, can be sold and leased back

when they are needed. The money earned from this can also be used for expansion of

the business’ operations.

3. Working Capital – the efficient management of a business’ working capital (by

reducing stock, getting debtors to pay the business quickly, etc.) releases capital

which can be put to other more effective uses like expanding the business’ operations.

 Internal funding has no major direct cost to the business (except leasing charges when

leasing back sold assets).

 Internal funding does not increase the liabilities or debts of the business.

 It is important to note that not all businesses can source funds internally – new

businesses and unprofitable businesses will not have access to retained earnings,

businesses with none or few idle assets will not be able to dispose of them.

 Depending on internal funding alone can slow down a business’ growth since it will

be strictly dependent on the business’ profitability, whether it has assets to sell and

how well it can manage its working capital. This is a limiting factor.

 With equity funding the business does not have to pay interest on loans (thus its

expenses/overheads are reduced) whereas with debt financing interest must be paid on

the loan(s).

 With equity financing, the invested capital becomes the permanent capital of the

business and does not have to be repaid to shareholders (it will be distributed when

the business is wound up) whereas with debt financing, the loan must be repaid in its
 entirety and provision has to be made for this – the money has to be found otherwise

the assets of the business which were used as collateral to secure the loan will be sold

to repay the debt if the business fails to meet its financial obligations. Even when

profits are low or the economy is slow, the loan must be repaid.

 With equity financing, gearing is low and this is less risky to the business whereas

with debt financing, gearing is high and this is a risky situation for the business

especially if it is having difficulty repaying the loan.

 With equity financing, more shares are issued by the business for sale in order to raise

funds. Anyone can purchase these shares and thus become an owner of the business

which poses a threat to the ownership and control of the business whereas with debt

financing, there is no dilution of ownership since the funders are creditors to the

business, not owners.

 With equity financing, a lot of costs are incurred to get the business listed on the

Stock Exchange, to issue the prospectus, to advertise the sale of shares, to print share

certificates, legal fees, etc. whereas with debt financing, costs are fewer.

 With equity financing, dividends are paid out of ‘after-tax’ profits, i.e. they are not tax

deductible whereas with debt financing, interest is paid before tax is calculated since

it is an expense and this reduces the amount of taxes the business pays to the

government.

 Both equity and debt financing has its advantages and disadvantages. A business has

to take into consideration several factors when deciding which of the two options is

better. Some of these factors which influence this decision are:

o The time period for which finance is required

o The amount required

o The risks involved

o The business’ gearing ratios

o The size of the business

o The business’ legal structure

o The owner’s desire to retain ownership and control

2002, 6

(a) The differences between an Income Statement and a Balance Sheet are:

1. Income statement describes the current year performance while balance sheet

describes the overall position of company right from the starting year of business to

current year.

2. Income statement provide the current year net profit information while balance sheet

provide information about the overall assets and liabilities of company applied in the

business.

3. Income Statement, also known as a Profit and Loss Statement, details the entity’s

income and expenses for a specific period of time. The last entry on the statement or

“bottom line” is the entity’s net profit or loss for that period. The Balance Sheet is a

"snapshot" of the entity’s financial position at a specific point in time. The first

section is Assets, or things the entity owns, which includes cash and investment

accounts, fixed assets, and receivables, among others. The next section of the

Balance Sheet is Liabilities and Equity. Liabilities, or things the entity owes, may

include such accounts as vendor payables, payroll taxes due, notes and mortgages.

Equity is the book value of the entity, and equals Assets - Liabilities. What accounts

are included depends on the business form of the entity. A sole proprietor has Owner

Equity; partners have Partner Capital; corporations have Capital Stock and Retained

Earnings.

http://wiki.answers.com/Q/What_is_the_difference_between_an_income_statement_a

nd_a_balance_sheet
 Balance sheets and income statements both offer valuable information on a

company’s financial health, but they differ in a few key ways. Here are five key

differences between a balance sheet and an income statement.

Time Covered: A balance sheet reports a company’s finances for a specific date, such

as January 1, 2022. An income statement reports a company’s revenue and expenses

over a specific period, such as January 1 – December 31, 2022.

Owning versus Performing: A balance sheet reports what a company owns (and

owes) at a specific date. An income statement reports how a company performed

during a specific period.

What’s Reported: A balance sheet reports assets, liabilities and equity/capital. An

income statement reports revenue and expenses.

What They’re Used For: A balance sheet is most often used by a company to see if

it has enough assets to satisfy its financial obligations. An income statement is used to

evaluate the company’s performance to see if it’s profitable.

Determining Creditworthiness: Lenders and creditors can use a balance sheet for an

overview of a company’s total assets. An income statement can serve as proof that a

company is profitable and can pay any liabilities.

https://societyinsurance.com/blog/what-is-the-difference-between-a-balance-sheet-

and-an-income-statement.

(b) Three ways that an income statement may be of use to managers are:

1. The income statement and its analysis show the results of a business’ operations. It

shows sales/revenue and expenses and tells whether the business is making a profit or

a loss as well as how effectively it is managing its expenses.

2. Managers use it to make comparisons over time as well as with other companies in

the same industry which helps to gauge the business’ performance with that of

competitors.

3. Higher levels of management tend to look at overall profitability ratios as the

standards by which their performance is judged and these ratios are derived from the

analysis of the income statement. It shows how the company is spending its money

and the effectiveness of its management.

4. Appropriation of profits.

Three ways that a balance sheet may be of use to managers are:

1. The balance sheet assists the managers of businesses in making decisions regarding

purchasing of assets for the business, e.g. business managers depend on the balance

sheet to analyse whether buying certain equipment via debt financing is the right

move for the business at that time.

2. Business managers need the balance sheet so as to decide the best source of credit for

the business at that time.

3. Management uses the balance sheet for diagnostic purposes - with different managers

paying attention to different ratios. A company buyer may look closely at inventory

turnover. Too much inventory may mean excessive storage space and spoilage,

whereas too little inventory could mean loss of sales and customers due to stock

shortages. A credit manager may be more interested in the accounts receivable

turnover to assess the correctness of her credit policies. A high sales-to-fixed-assets

ratio reflects efficient use of money invested in plant and in other productive or

capital assets.

4. Attract investors.
2003, 5

Working capital is your net current assets (Working capital = Current Assets –

Current Liabilities). It refers to the funds needed to meet the daily operations of a

business (to purchase stock, pay utilities, wages, etc.). Too much or too little working

capital poses problems to a business. Therefore, working capital must be carefully

managed to ensure adequate funds when needed. In order to manage it optimally,

you’d need to manage debtors, creditors, stock and cash. I will now discuss ways that

Arawak Limited can use to increase its working capital:

Increasing working capital

A firm that has liquidity problems has a number of options
that can be used to increase working capital. However, each
must be carefully analysed before the decision is made.
Some of the options are outlined below:
Additional funds from owner(s)
Businesses that have a cash flow problem can increase their
cash base from additional funds being ploughed into the
business by the owner. This money can represent either
additional capital from the owner or a loan to the business.
In the case of a sole trader, funds may be taken from personal
savings, relatives or friends. In the case of a company,
additional shares may be sold to families and friends or on
the stock exchange in the case of a public company.
Dispose of non-productive assets
Some businesses are ‘rich on their books but poor in their
till’. The reason for this is that there are non-productive
fixed assets on their balance sheets that could be disposed of
to solve liquidity problems. Fixed assets which are not being
used, but still saleable, should be disposed of to increase the
CHAPTER 13 | THE NEED FOR CAPITAL AND SOURCES OF FINANCE 139
amount of cash available to the business and thus increase
working capital. For example, a business that carries out
delivery may have a number of defective vehicles in its
parking lot that could be scrapped and sold.
Increase net profit
By increasing its net profit, a business can also increase its
working capital. Increasing profit will result in an increase
in the current asset cash or bank. This can be accomplished
by either reducing the firm’s expenses or increasing the
revenue gained from the sale of its products, providing that
its gross profit is high enough. This is to say that, even if the
firm sells a lot of products but its production and trading
costs are high, its gross profit may not be significant. Another
option for the firm would be to assess its operations in order
to identify areas where resources are being wasted and to
tighten these areas. Cutting waste of resources helps the
firm to save money that would otherwise be lost.
Debt switching
Firms may want to explore the option of switching debts from
short term to long term. This can be accomplished through
debt switching or refinancing. This is the process of raising
a new loan to pay off existing loans. The business may want
to acquire long-term financing to retire (repay) short-term
loans which are putting pressure on its working capital.
While this seems like a ‘Band-Aid’ approach, it can provide
extra cash for businesses in the short to medium term.
Factoring
Factoring is an agreement, between a specialist finance
company and a business that is in need of ready cash, to
purchase the amount owed by debtors. In essence, the
factoring company will wait for the payments from the
debtors while the firm will get the cash needed. The amount
paid by the factoring company to the firm will usually be
less than the amount owed to the firm by the debtors. The
disparity between the two figures will provide the factoring
company with a profit. This is because the factoring company
makes money by paying out to the firm less than what is
owed by the debtors. This could be seen as the payment or
incentive given to the factoring company for taking on the
firm’s debt. Although the firm may be giving up some of the
money that is owed to it by its debtors, the arrangement will
provide ready cash which will increase its working capital.
Increasing stock turnover
The amount of times that stock turns over is also of interest
to the organisation. A high rate of turnover will provide the
business with more cash in hand to cover its day-to-day expenses and bills. If the need arises, the business
may
have to sell some of this stock at below list price to generate
additional income.

(b) Three criteria that Arawak Limited may use to choose among the alternatives

identified in (a) above and an explanation as to how EACH criterion may be used to make the

choice now follows:

2004, 6

The journal entries to record the adjustments to the final accounts now follow:

KD Limited’s General Journal

Date Details Folio Dr ($) Cr ($)

(i) Rent expense 172.00
Accrued Rent 172.00
Amount of rent incurred but not yet paid (in
arrears).
(ii) Prepaid insurance 104.00
Insurance 104.00
Amount of insurance paid in advance.
(iii) Bad debt expenses GL 320.00
W. Loo (debtor) SL 320.00
Debt written off as bad.
(iv) Profit and Loss a/c 215.00
Provision for bad debt 215.00
Provision for bad debts increased.
(v) Sep 30, Depreciation Expense 3,450.00
1999 Accumulated depreciation 3,450.00
Accumulated depreciation: Equipment
increased.
2007, 6

(b) Cost of Goods Sold (COGS) = Opening Stock + Purchases – Closing Stock

Month Opening Stock + Purchases - Closing Stock COGS

Jan 300 (15x20) 0 300 0

Feb 300 450 (25x18) 750 0

Mar 750 0 426 (7x18)+(15x20) 324 (18x18)

Apr 426 220 (10x22) 646 0

May 646 0 646 0

Jun 646 0 318 (1x18)+(15x20) 328 (10x22)+(6x18)

(c) Trading Account: Sales – COGS = Gross Profit

Month Sales - COGS Gross Profit

Jan 0 0 0

Feb 0 0 0

Mar 936 (18x52) 324 612

Apr 0 0 0

May 0 0 0

Jun 832 (16x52) 328 504

Gross Profit = 1,768 – 652 = 1,116

 Kensington Creations

Trading Account for six-month period ending June 30

$ $

Sales Revenue (34 units @ $52) 1,768

Less: COGS

Opening Stock 300

Plus Purchases 670

Less Closing Stock 318 652

Gross Profit 1,116

2008C, 5

(a)(i) Prepayments – these are payments made in the current accounting period for the

upcoming accounting period. These expenses are paid before the goods and services

are used. These expenses, though paid for in the current accounting period, are not

treated as expenses of the current accounting year but of the year that they are

incurred (Accrual Basis of Accounting & Matching Principle). Therefore,

adjustments will have to be made to ensure that this happens. For example, rent for

January 2013 is paid in December 2012.

(ii) Accrued expenses – these are expenses that have been incurred (the benefits have

been enjoyed in the current accounting period) but the amounts have not yet been

paid. The amounts will be paid in the following accounting period but these expenses

have to be treated as expenses for the current period since this is when they were

incurred (Accrual Basis of Accounting & Matching Principle). Therefore adjustments

will have to be made to ensure that this happens. For example, rent for December

2012 is not paid until January 2013.

(b)(i) Depreciation expense for equipment (10% on a reducing balance basis)

Equipment at cost = 20,240

Accumulated provision for depreciation = 8,400

New net book value = 20,240 – 8,400 = 11,840

Depreciation = 10% of new net book value = $1,184

(ii) Depreciation expense for vehicles (15% straight line basis)

Depreciation = Initial Cost x Fixed% = 11, 500 x 15% = $1,725

(iii) % provision for doubtful debts = (1,240/15,500) x 100 = 8%

New debtor amount = 15,500 – 625 = 14,875

New Provision for doubtful debts = 8% x 14,875 = $1,190

(iv)

The Corner Shop

Trading and Profit and Loss Account for the year ending 30th June 2005

$ $

Sales 21,200

Less: COGS 4,350

Gross Profit 16,850

Less: Expenses

Rent (2490 + 200) 2,690

Bad Debts 625

Depreciation on Equipment 1,184

Depreciation on Motor Vehicle 1,725 6,224

Net Profit 10,626

2009, 5

(a)(i) Working capital can be defined as the funds needed to meet the daily financial

obligations of a business. It is the short-term financial resources that a business has

for funding its day-to-day operations. It is needed to meet the everyday expenses of a

business, for example to purchase stock, pay utilities, wages, etc. It is often described

as the ‘lifeblood’ of a business. Working capital is calculated using the following

formula: Working Capital = Current Assets – Current Liabilities

(a)(ii) Three components of working capital are:

1. Cash (in hand/at the bank)

2. Creditors

3. Debtors

4. Stock (raw materials, work-in-progress and finished goods)

(b) The most suitable source of finance for financing each of the following areas of the

business with an explanation as to why it is the most suitable now follows:

Items that need financing Most suitable source of finance

Land and building Long term loan at a commercial bank (mortgage)
Machinery and equipment Lease or hire purchase
Stock of petrol Trade creditors
Stock for convenience store Trade creditors
Wages for employees (for the 1st Bank overdraft
week) Credit card
Owner’s personal savings
Sales made by the business during the first week of
operations
In order for Buddy to finance land and building for his new gas station and convenience

store, his best option would be to seek funding from a commercial bank. This will be a long-

term business loan for investment/development purposes. The property (land and building)

can be used as the collateral to secure the loan (mortgage).

He will have to seek external debt funding since his business is new and he cannot fund it

through retained earnings. Property is expensive and it is expected that the loan will be for a

significant amount and the repayment period will be for an extended period of time (greater

than five years).

In order to purchase machinery and equipment, Buddy should look at external, medium-term

funding. He may not want (be able) to take a medium-term loan since he would have already

taken one to purchase property and his gearing ratios may be too high. He can choose instead

to lease or to purchase the machinery and equipment via hire purchase. In both instances,

he will be paying a monthly fee (instalment) for the items which should prove to be more

affordable to him.

With respect to leasing, Buddy will be paying a rental fee on the machinery and equipment.

The machinery and equipment will not be owned by Buddy but by the lessor. The lease can

be terminated by either party. With respect to hire purchase, he may or may not have a

down-payment to make and he makes regular instalments. He gets use of the item while it is

being paid for and becomes the owner when his final payment is made. The downside to this

is that the final price that he pays is usually significantly more than if the items were

purchased for cash (as opposed to credit).

The best way to fund the stocking of his gas station and convenience store is by taking credit

from traders/suppliers. This will help him to better manage his working capital. He is

looking at external, short-term financing to fund the stocking of his business. Bank

overdrafts can be too expensive and he may not be able to get short-term loans because of his

gearing ratios.

Buddy will have to apply to these suppliers for credit and they will check his credit

worthiness to determine whether to extend credit to him. Not everyone will be willing to

extend credit but until he is in a better financial position, he can purchase from those

suppliers who are willing to supply him with goods and services on credit. When he can

afford to do so, he can expand his product offerings by paying cash to those suppliers that

don’t give credit. Buddy will have to ensure that he maintains his credit worthiness with his

creditors otherwise they may cease giving him credit.

Buddy can use a bank overdraft facility to pay his employees their wages for the first week of

operations. He needs to look at external, short-term financing. He will not want to

necessarily take a (short-term) bank-loan for this so his best option is the bank overdraft –

gives him short-term access to funds. Once he makes sales and deposits it into the business’

account, he will be ok. Bank overdraft facilities are very expensive (high interest rates) so he

will not want to owe the bank for any great length of time, maybe just for a few days at most.

If Buddy has access to a credit card, he can use this to pay his employees via cash advances.

Of course he will want to make payments on the credit card to avoid additional expenses.
2010, 6

(a) (i) A cash flow statement reveals the cash flows generated or consumed by a firm’s

operating, investing, and financing activities during an accounting period. It provided

information to users about cash receipts, cash payments, and the net change in cash

resulting from operating, investing, and financing activities of a business during its

accounting year. It enables users to assess a firm’s ability to meet its obligations as

they mature (solvency).

(ii) Two financial statements, other than the cash flow statement, that are used by firms

are:

1. Trading and Profit and Loss Account aka Income Statement aka Statement of

Comprehensive Income

2. Balance Sheet aka The Statement of Financial Position

(b) An analysis of the cash flow situation of Nigel Enterprises under each of the

following headings now begins:

(i) Net cash inflow or outflow from operating activities

(ii) Returns on investment and servicing of finance

(iii) Net cash outflow from investing activities

(iv) Increase or decrease in cash equivalents

(v) Financing
2011, 6

(a) One way in which the final accounts of a business serve as a major source of

information to each of the following stakeholders is explained below:

Stakeholders Financial Info they are interested in:

Investors Profits and profitability ratios to determine whether dividends will be paid

Also interested in efficiency ratios to ensure that their capital is being

effectively utilised to derive the greatest returns on their investments

Suppliers Working Capital, Current Ratio, Acid Test Ratio which tells them the

position the business is in to pay off its short term debts. Cash flow

statements.

Government Amount of profits to ensure that the correct amount of taxes has been paid.

Audited financial statements.

Business Have to ensure that they have money to meet all their financial obligations

Managers as they become due – they’d be interested in liquidity and leverage ratios.

(b) (i) A cash flow statement reveals the cash flows generated or consumed by a firm’s

operating, investing, and financing activities during an accounting period. It provided

information to users about cash receipts, cash payments, and the net change in cash

resulting from operating, investing, and financing activities of a company during its

accounting year. It enables users to assess a firm’s ability to meet its obligations as

they mature (solvency).

(ii) Two advantages of a cash flow statement to John’s business are:

1. It helps a business to know its inflows and outflows of cash and to predict periods of

cash shortages and thus take preventative measures like overdraft facilities, etc. It can

also help to prevent cash shortages from occurring. A cash flow statement will be

very helpful for planning and management of future financial commitments.

2. It helps a business to predict periods of cash surpluses and to put strategies in place to

benefit from these, e.g. short-term investments. These will generate interest and grow

the business’ money until the money is needed again to purchase stock, etc.

3. It helps investors judge whether the company is financially sound.

(c)

John’s Chemicals and Supplies

Trading and Profit and Loss Account for the period ended May 31, 2010

$ $

Sales 55,000

Less: Cost of Goods Sold

Opening Stock 18,000

Plus Purchases 30,000

Less Closing Stock 7,500 40,500

Gross Profit 14,500

Plus: Profit made on sale of plant 4,000

Total Revenue (before expenses) 18,500

Less: Expenses

Electricity 1 020

Stationery 250

Rent 1 830

Advertising 1 490

Depreciation of motor vehicles 2 000

Insurance 1 090

Sundry expenses 248 7,928

Net Profit 10,572

2017, 3

(a)(i) Current assets are assets that are expected to be converted to cash within a year.

Examples of current assets include cash in hand, cash at bank, debtors, stock,

prepayments, etc.

Current assets represent assets that can easily be converted into cash, sold or

consumed within a one-year period. These assets appear in the balance sheet in the

order of liquidity, starting with least liquid and moving to most liquid.

(c)

Beautiful Flowers
Balance Sheet as at December 31, 2016
$ $ $
Fixed Assets
Building 62,660
Equipment 20,000 82,660

Current Assets
Stock 8,360
Debtors 28,000
Cash 8,500 44,860

Current Liabilities
Bank overdraft 24,720
Creditors 26,200 50,920
Working Capital (6,060)
76,600

Finance by:
Capital 76,600
2019, 3 (CXC)

(a) Two sources of short-term financing available to Country Farmhouse Soy Products

which can assist in the expansion of the business operations are:

1. Bank overdraft - The Pearts can enter into an arrangement with their bank to allow

them to withdraw money in excess of their account balance over a short period of

time. This is a very good option for The Pearts since they would only pay interest on

the amount used and there is no penalty to repay early.

2. Credit card - A credit card allows the Pearts the facility to use funds from the bank up

to the agreed limit on the card. There is no penalty if the amount used on the credit

card is repaid within the month. This can provide opportunities for the Pearts to hold

the bank’s money for an extended time without repaying the full amount early.

3. Trade credit – The Pearts can purchase goods and services from various suppliers on

credit. They will be able to produce and sell their goods and use the sales generated

to pay for the goods and services purchased from the suppliers at a later agreed upon

date.

(b) Three benefits to Country Farmhouse Soy Products of investing in the country’s stock

exchange are:

1. Dividend income: Most stocks provide income in the form of dividends. Dividends

are paid to investors quarterly, semi-annually or annually. The Pearts do not have to

take the dividends right away. They can reinvest it to keep increasing their earnings

over time. Even though dividend payment is usually small, over time it can grow into

significant gains for the Pearts. (1) This income can help fund expansion or assist with

seeking to set up a subsidiary overseas.

2. Higher return on investment: Returns on the stock market usually outperform other

kinds of investments. Investing in a financially strong business can guarantee high

yields on investment. Overtime, the stock market tends to rise in value though there

is some fluctuation. The Pearts can also invest in different stocks as a way of hedging

the risks. This is a safe and sure form of investment especially since they do not

intend to use the money right away.

3. Investment gain/capital gain: Investing in the stock exchange will give Country

Farmhouse the chance to grow the money invested. The value of stocks is increasing

over time; therefore the stock can be sold at a greater price. The Pearts stand to

receive higher returns on the original amount invested over time. Investments in

stable companies that are able to grow tend to make huge profits for investors over

time. Country Farmhouse therefore stands to benefit from their investment.

4. Ownership: When one invests in the stocks of a firm, he or she becomes part owner.

This provides opportunities for the Pearts to attend annual general meetings and get

an insight into how the company is operating including its secret to success. This

kind of information can assist the Pearts in getting ideas as to how to grow their small

business over time. The Pearts would also get the opportunity to vote on business

decisions and leadership changes within the firm in order to assist the firm to become

even more profitable. The more profitable the firm is, the more earnings the Pearts

will receive.
(ii)

Country Farmhouse Soy Products

Balance Sheet as at December 31st 2018

$’000

Fixed Assets 1 150

Current Assets

Inventories 500

Trade receivables 1,000

Cash at bank and in hand 50 1,550

Less: Current Liabilities

Trade payables 800

Net Current Assets 750

1,900

Less: Non-Current Liabilities

Trade payables 300

1,600

Financed by:

Owners’ equity 1,600

2021, 3 (CXC)

(a)(i) Fixed assets are tangible pieces of property that a firm owns and uses in its operations

to generate income. Fixed assets are not expected to be consumed, sold or converted

into cash within a year. They are bought for production or supply of goods or

services, for rental to third parties, or for use in the organization. The term fixed

refers to the fact that these assets will not be used up or sold within the accounting

year. Examples of fixed assets are property, plant, furniture and equipment.

(ii) Owner’s equity is defined as the proportion of the total value of a company’s assets

that can be claimed by the owners. It is calculated by deducting all liabilities from

total assets. Owner’s Equity = Total Assets – Total Liabilities.

(b) One reason why Mrs Greenleaf should prepare each of the following Financial

Statements is as follows:

(i) Income statement

1. Assists with budgeting: Mrs Greenleaf should prepare the Statement of

Comprehensive Income to find out which areas of their business are over or under

budget. This statement will allow her to pinpoint specific items that are causing

unexpected expenditures, such as cell phone use, advertising, or supply expenses.

2. Facilitates comparisons: Mrs Greenleaf should prepare the Income Statement so she

can measure and compare the performance of her business overtime (trend analysis)

or with other businesses of a similar nature or in the same industry. They could

compare various expected levels. This will enable her to see if she has improved areas

of her business such as sales revenue/less expenses. These comparisons will also
 allow her to make informed decisions with the aim of improving the operations of the

business over a given period.

3. To determine profitability: Mrs Greenleaf should prepare a Statement of

Comprehensive Income to track revenues and expenses to determine the gross

profit/loss and the net profit/loss the canteen could be generating during a reporting

period.

(ii) Statement of financial position/Balance sheet

1. Reveal the financial status of the restaurant: Mrs Greenleaf should prepare the

Statement of Financial Position in order to determine the financial status and health of

the business as of a specific point in time. The statement shows what an entity owns

(assets) and how much it owes (liabilities), as well as the amount invested in the

business (equity). This statement will give Mrs Greenleaf an idea of how much debt

vs capital is running her business.

2. To help determine working capital: Working capital is defined as the difference

between current assets and current liabilities. Mrs Greenleaf should prepare a

Statement of Financial Position to determine if the cash and/or other assets that can be

easily converted into to cash, can adequately cover its current or pressing obligations

such as, creditors, short-term loans and bank overdraft.

(iii) Statement of cash flow

1. Predict future Cash flows: Mrs Greenleaf will be interested to know the ability of the

business to generate positive cash flows in future. The Statement of Cash Flow

enables these parties to understand how company manages cash and to anticipate the

impact of current cash receipts and cash disbursements on future cash flows of the

business.
 2. Provides an explanation for the changes in cash: Mrs Greenleaf should prepare the

Statement of Cash Flow to ascertain the reasons why cash fluctuated during the

accounting period. She can examine the details of cash generated and cash used to

perform operating, investing and financing activities of the business. This will allow

her to make informed decisions.

(c)
Caribbean Eatery
Statement of Comprehensive Income for the year ended 31st December 2020
$ $ $
Sales 56,900
Less: COGS
Opening Stock 0
Add Purchases 17,215
Add Freight in 1,295 18,510
Less Purchase returns 1,585
Less Closing Stock 2,000 14,925
Gross Profit 41,975
Add Discounts received 1,891
Total Revenue 43,866
Less: Expenses
Rent paid 3,600
Electricity 23,000
Insurance 2,460
Telephone (1,230 + 270) 1,500
Cooking gas bill 3,500
Water rates (4,986 – 1,000) 3,986
Delivery to customers 1,260
Advertisements 1,684 40,990
Net Profit 2,876
2022, Q3

(a)(i) Short-term financing is a way of meeting the financial requirements of a business for

a short period (for periods no more than 1 year). Short-term financing means that the

business if financing from short-term sources.

Short-term usually refers to a period of time of one year or less. Funding that is

sourced on a short-term basis is not normally used for long-term financing in the

organisation. It may be used for financing day-to-day activities. These funds might

come from one of three major sources:

o Bank overdraft

o Debt factoring

o Trade credit

(ii) Equity (aka owner’s equity) is defined as the proportion of the total value of a

company’s assets that can be claimed by the owners. It is calculated by deducting all

liabilities from total assets. Equity = Total Assets – Total Liabilities.

(b) Three reasons why the loans officer at the commercial bank needs to see the income

statement for Paul and Peta Estate are:

1. Identifies revenue streams: The loans officer will want to be able to identify the

various revenue streams of the business. For most businesses, the major revenue

comes from sales but there can be secondary sources of revenue. The loans officer

will want to compare revenue over time. If revenue streams are increasing, it may

suggest that the business will be able to afford the loan payments. Of course,

expenses will have to factor in as well.

 2. Identifies various expenses of the business: The loans officer will want to be able to

identify the specific expenses of the firm and to see if these are increasing or

decreasing over time. If expenses are excessive or increasing, it may become difficult

for the firm to meet its loan repayments. The managers of the firm will be advised to

tighten up on their expenditure.

3. To determine profitability: The loans officer will be able to look at revenues in

comparison to expenses to determine whether the business is making a gross

profit/loss and a net profit/loss during a reporting period.

4. Ratio analysis: The loans officer will be able to calculate several profitability and

liquidity ratios (among others) that will provide great insight in the business’

performance. These ratios can be used to compare the business over time or to

compare it with other businesses in the industry.

(c)(i) Working Capital = Current Assets – Current Liabilities

= (50,000+35,000+12,000+25,000) – (17,000+5,000+2,000)

= 122,000 – 24,000

= 98,000

(ii) Two ways in which Paul and Peta Estate’s working capital as at December 2020 can

assist the Peters in making informed decisions about the future of their business are:

1. The business will want to ensure it has adequate levels of working capital to meet its

short-term financial obligations. A chronic short-fall in working capital often spells

doom for a business. A healthy supply of working capital suggests a healthy business,

one that can survive and thrive. They can use their calculations of working capital to

determine whether they are in a favourable position or not. The can also calculate the
 acid-test/quick ratio and the current ratio to help them decide if their working capital

is in a favourable range or not.

2. The business has to ensure it has a healthy amount of working capital. If there is a

short-fall, the business managers will have to make decisions/come up with strategies

to increase their working capital so that they can meet their short-term financial

obligations as they become due. Having too much working capital in the business is a

sign of inefficiency. The business will have to decide on the optimal level of working

capital and if there is any surplus of working capital, some of it can be invested in

short-term investment instruments until the funds are needed by the business. Proper

management of all the elements of working capital (debtors, creditors, stock and cash)

is important to keep the business performing efficiently.