CHAPTER 5

PREPARATION OF FINANCIAL STATEMENTS

Question 1
“Sorted”
Income Statement for the year ended 30 September 2018
$ $
Revenue 249 500
Electricity 4 010
Insurance 1 730
Manager’s salary 38 800
Office expenses 4 190
Rent 13 740
Staff wages 70 560
Depreciation of non-current assets 7 220
140 250
Profit for year 109 240

Question 2

Fay
Income Statement for the year ended 30 June 2018
$ $
Revenue 173 200
Add income:
Decrease in provision for doubtful debts 230
173 430
Less expenses
Advertising charges 730
Irrecoverable debts 380
Insurance 1 470
Travelling expenses 790
Wages 48 870
Depreciation of non-current assets 9 125
(61 365)
Profit for year 112 065
Question 3

“Venus Beauty Studios”

Income Statement for the year ended 31 May 2018

$ $
Revenue 192 990
Add income:
Profit from sale of old equipment 270
193 260

Electricity 8 810
General expenses 8 950
Materials (cosmetics, etc.) 25 320
Rent 18 780
Wages of assistants 66 370
Water charges 7 740
Depreciation of non-current assets 18 480
(154 450)
Profit for year 38 810

Note: depreciation is $14,000 (equipment) + $4,480 (furniture and fittings) = $18,480

Statement of financial position at 31 May 2018

$ $ $
NON-CURRENT ASSETS Cost Total Net
Deprcn
Equipment 56 000 28 000 28 000
Furniture and fittings 28 000 10 080 17 920
84 000 38 080 45 920
CURRENT ASSETS
Other receivables 490
Cash and cash equivalents 8 580
9 070
54 990
CAPITAL
Opening balance 45 580
Profit 38 810
84 390
Drawings (31 850)
52 540
CURRENT LIABILITIES
Trade payables 1 820
Other payables 630
2 450
54 990
Question 4
“Zamran’s Taxis”
Income Statement for the year ended 31 July 2018

$ $
Revenue 174 330
Less expenses:
Drivers’ wages 96 870
Insurance 13 480
Office expenses 5 570
Loan interest 3 320
Loss on sale of vehicle 760
Rent 22 240
Vehicle fuel charges 22 730
Vehicle repairs 5 610
Depreciation of non-current assets 32 500
(203 080)
Loss for year 28 750

Note: depreciation is $3,700 (furniture and equipment) + $28,800 (vehicles) = $32,500

Statement of financial position at 31 July 2018

$ $ $
NON-CURRENT ASSETS Cost Total Net
Deprcn
Vehicles 180 000 64 800 115 200
Furniture and equipment 18 500 7 400 11 100
198,500 72 200 126 300
CURRENT ASSETS
Trade receivables 770
Other receivables 860
1 630
127 930
CAPITAL
Opening balance 167 120
Loss (28 750)
138 370
Drawings (41 580)
96 790
NON-CURRENT LIABILITIES
Bank loan 25 000
CURRENT LIABILITIES
Trade payables 640
Other payables 1 450
Cash and cash equivalents 4 050
6 140
127 930

Question 5

Aquasupreme
Income Statement for the year ended 31 December 2018

$ $ $
Revenue 309 340
Opening inventory 33 000
Purchases 184 400
217 400
Closing inventory (36 400)
Cost of sales (181 000)
Gross profit 128 340
Add income:
Discounts received 310
128 650
Less expenses
Administration expenses 11 470
Discounts allowed 280
Insurance 2 570
Increase in provision for doubtful debts 150
Rent 13 490
Wages and salaries 67 800
Depreciation of non-current assets 21 150
116 910
Profit for year 11 740

Note: increase in provision for doubtful debts is old provision $940 – old provision $790 =
$150
 Statement of financial position at 31 December 2018
$ $ $
NON-CURRENT ASSETS Cost Total Net
Deprcn
Goodwill 40 000
Other non-current assets 84 600 63 450 21 150
CURRENT ASSETS 61,150
Inventory 36,400
Trade receivables 18,800
Less provision for doubtful debts (940)
17,860
Other receivables 170
Cash and cash equivalents 3,720
58,150
119,300
CAPITAL
Opening balance 115,380
Profit 11,740
127,120
Drawings (31,500)
95,620
CURRENT LIABILITIES
Trade payables 23,290
Other payables 390
23,680
119,300

Working capital is $34,470; capital employed is $95,620

Question 6

Hosein
Income Statement
for the year ended 31 May 2018
$ $ $
Revenue 341 000
less sales returns (1 640)
339 360
Opening inventory 14 330
Purchases 224 360
less purchases returns (2 220)
222 140
236,470
Closing inventory (11 840)
Cost of sales (224 630)
Gross profit 114 730
Add income:
Decrease in provision for doubtful debts 50
114 780
Less expenses
Bank loan interest 1 310
Electricity 2 080
General expenses 2 720
Salaries 84 230
Water charges 2 250
Depreciation of non-current assets 15 000
(107 590)
Profit for the year 7 190
 Statement of financial position at 31 May 2018
$ $ $
NON-CURRENT ASSETS Cost Total Net
Deprcn
Goodwill 15 000
Other non-current assets 75 000 30 000 45 000
60 000
CURRENT ASSETS
Inventory 11 840
Trade receivables 4 890
Less provision for doubtful debts 220
4 670
Other receivables 440
16 950
76 950
CAPITAL
Opening balance 65 220
Profit 7 190
72 410
Drawings (28 860)
43 550
NON-CURRENT LIABILITIES
Bank loan 14 000

CURRENT LIABILITIES
Trade payables 18 300
Other payables 780
Cash and cash equivalents 320
19 400
76 950

Working capital is -$2 450; capital employed is $57 550.

Question 7

(a) Three advantages from: sole control, receives all profits, low capital requirements, easy
to set up business.
(b)

Salman’s Garden Maintenance

Income Statement for the year ended 31 December 2018
$ $
Revenue 36 120
Add recovery of debts written off 90
36 210
Less expenses
Administration expenses ($1460 – 180) 1 280
Discounts allowed 130
Insurance [$810 – (2/3 x 450)] 510
Interest on bank loan $440 + (1/12 x 6% x $8000) 480
Irrecoverable debts written off 260
Vehicle running costs 770
Wages of assistant ($9 940 + 220) 10 160
Depreciation of non-current assets (W1)
Equipment 360
Garden tools 210
Motor vehicles 3 580
(17 740)
Profit for the year 18 470

W1 Depreciation charges
Equipment: 15% x $2400 = 360
Garden tools: opening valuation $870 + purchases $190 = $1060 less closing valuation
$850, i.e. 210
Motor vehicle: nbv 17 900 ($22 400 - $4500) x 20% = $3580
(c)
Statement of financial position at 31 December 2018
$ $ $
NON-CURRENT ASSETS Cost/Vltn Total Net
Deprcn
Motor vehicle at cost 22 400 8 080 14 320
Equipment at cost 2 400 1 080 1 320
Garden tools at valuation 850 850
25 650 9 160 16 490
CURRENT ASSETS
Trade receivables 2 130
Other receivables ($180 + 300) 480
Cash and cash equivalents 3 740
6 350
22 840
CAPITAL
Opening balance 15 680
Profit for year 18 470
34 150
Drawings (19 570)
14 580
NON-CURRENT LIABILITIES
Bank loan 8 000

CURRENT LIABILITIES
Other payables ($220 + 40) 260
22 840

(d)(i) Working capital: current assets $6350 – current liabilities $260 = $6090
(ii) Capital employed:
Either: closing capital $14 580 + non-current liabilities $8 000 = $22 580
Or: non-current assets $16 490 + working capital $6 090 = $22 580
Question 8

(a) Three disadvantages from: unlimited liability for debts; demands of running a business
with only one owner; inability to gain economies of scale when purchasing; lack of others
to consult with over key decisions.
(b)

Cool Glamour
Income Statement for year ended 31 October 2018
$ $ $
Revenue 391 000
less sales returns (630)
390 370
Opening inventory 38 400
Purchases ($188 300 – drawings $1 440 186 860
Carriage inwards 1 560
less purchases returns (1 410)
187 010
225 410
Closing inventory (33 300)
Cost of sales (192 110)
Gross profit 198 260
Add income:
Profit on sale of fittings 320
Discounts received 290
610
198 870
Less expenses
Discounts allowed 140
Insurance 1 760
Interest on bank loan 280
Rent [$63 400 – (1/3 x $17 400) 57 600
Wages and salaries 53 200
Provision for doubtful debts (5% x $12 000) 600
Depreciation of furniture and fittings (W1) 6 280
(119 860)
Profit for the year 79 010

W1 Depreciation of furniture and fittings: 20% x ($48 900 - $17 500), i.e. $6280.
(c)

Statement of financial position at 31 May 2018

$ $ $
NON-CURRENT ASSETS Cost Total Net
Deprcn
Goodwill 42 000
Furniture and fittings 48 900 23 780 25 120
67 120
CURRENT ASSETS
Inventory 33 300
Trade receivables 12 000
Less provision for doubtful debts 600
11 400
Other receivables 5 800
Cash and cash equivalents 880
51 380
118 500
CAPITAL
Opening balance 46 300
Profit 79 010
125 310
Drawings ($22 280 + 1440) (23 720)
101 590
CURRENT LIABILITIES
Bank loan (repayable March 2020) 2 400
Trade payables 14 440
Other payables 70
16 910
118 500

(d)(i) Working capital: current assets $51 380 – current liabilities $16 910, i.e. $34 470
(ii) Capital employed:
Either: capital $101 590 + non-current liabilities $0 = $101 590
Or: non-current assets $67 120 + working capital $34 470 = $101 590