QUESTION
Question 1 – Sole Trader Financial Statements
Philip is a sole trader who manufactures and sells a single product. In his first month of trading, January 2019, he records the following transactions:
01 January Philip started business and invested £10,000, which he deposited into a business bank account.
02 January Purchased a machine to use in the production of goods for £5,100 and paid by bank transfer.
03 January Bought raw materials from ABC Ltd to use in the production of goods for £1,750 on credit.
03 January Bought stationery for £95 and paid using the company debit card.
05 January Paid £550 by bank transfer for January rent and £360 by bank transfer for annual business insurance for the period 01/01/2019 to 31/12/2019.
08 January Sold finished goods to customers for £2,100, the customers paid cash. The cost of goods sold was £1,500.
12 January Bought raw materials from ABC Ltd to use in the production of goods for £2,900 on credit.
15 January Sold finished goods to customers for £1,330 the customers paid cash. The cost of goods sold was £950.
16 January Sold finished goods on credit to a retail customer for £2,660. The cost of goods sold was £1,900.
18 January Bought raw materials from ABC Ltd to use in the production of goods for £3,500 on credit.
19 January Paid ABC Ltd £4,650 by bank transfer.
23 January Sold goods to a retail customer for £3,680 on credit and sold further goods to customers for £800 for cash. The cost of goods sold was £3,200.
26 January Philip withdrew £2,000 cash from the business for personal use.
28 January Paid £550 by bank transfer for February rent.
31 January Received £2,660 by bank transfer for credit sales.
Additional information:
• A telephone bill dated 05/02/18 for £35 for the period 01/01/2019 to 31/01/2019 was received in February.
• Depreciation is charged at a rate of 20% per annum on the cost of all non-current assets starting in the month of purchase.
Required
(a) Prepare a trial balance
(b) Prepare an income statement
(c) Prepare a statement of financial position
(d) Prepare a cash statement
Question 2 – Financial Statements Analysis
The following information relates to Dunstan Limited for the two years to 31 December 2017 and 2018 respectively:
Required
(a) Calculate the following accounting ratios for the two years 2017 and 2018 respectively:
(i) gross profit margin
(ii) net profit margin
(iii) current ratio
(iv) quick ratio
(v) trade receivable days
(vi) trade payable days
(vii) Inventory turnover days
Note: For all ratio calculations use year-end figures and not averages
(b) Compare and contrast the company’s performance for the years 2017 and 2018
ANSWER
Answer-1
| Journal Entries | |||
| Date | Accounts | Dr | Cr |
| 01-Jan | Cash | £ 10,000.00 | |
| capital | £ 10,000.00 | ||
| 02-Jan | Machinery | £ 5,100.00 | |
| Cash | £ 5,100.00 | ||
| 03-Jan | Inventory | £ 1,750.00 | |
| Accounts Payable-ABC Ltd | £ 1,750.00 | ||
| 03-Jan | Stationery | £ 95.00 | |
| cash | £ 95.00 | ||
| 05-Jan | Rent | £ 550.00 | |
| Prepaid Insurance | £ 360.00 | ||
| Cash | £ 910.00 | ||
| 08-Jan | Cash | £ 2,100.00 | |
| Revenue | £ 2,100.00 | ||
| 08-Jan | COGS | £ 1,500.00 | |
| Inventory | £ 1,500.00 | ||
| 12-Jan | Inventory | £ 2,900.00 | |
| Accounts Payable-ABC Ltd | £ 2,900.00 | ||
| 15-Jan | Cash | £ 1,330.00 | |
| Revenue | £ 1,330.00 | ||
| 15-Jan | COGS | £ 950.00 | |
| Inventory | £ 950.00 | ||
| 16-Jan | Accounts Receivable | £ 2,660.00 | |
| Revenue | £ 2,660.00 | ||
| 16-Jan | COGS | £ 1,900.00 | |
| Inventory | £ 1,900.00 | ||
| 18-Jan | Inventory | £ 3,500.00 | |
| Accounts Payable-ABC Ltd | £ 3,500.00 | ||
| 19-Jan | Accounts Payable-ABC Ltd | £ 4,650.00 | |
| Cash | £ 4,650.00 | ||
| 23-Jan | Accounts Receivable | £ 3,680.00 | |
| Cash | £ 800.00 | ||
| Revenue | £ 4,480.00 | ||
| 23-Jan | COGS | £ 3,200.00 | |
| Inventory | £ 3,200.00 | ||
| 26-Jan | Capital | £ 2,000.00 | |
| cash | £ 2,000.00 | ||
| 28-Jan | Prepaid Rent | £ 550.00 | |
| Cash | £ 550.00 | ||
| 31-Jan | Cash | £ 2,660.00 | |
| Accounts Receivable | £ 2,660.00 | ||
| 31-Jan | Insurance | £ 30.00 | |
| Prepaid Insurance | £ 30.00 | ||
| 31-Jan | Telephone Expenses | £ 35.00 | |
| Telephone bill payable | £ 35.00 | ||
| 31-Oct | Depreciation | £ 85.00 | |
| Accumulated Depreciation | £ 85.00 | ||
| Cash | |||||
| Date | Account | Amount | Date | Account | Amount |
| 01-Jan | capital | £ 10,000.00 | 02-Jan | Machinery | £ 5,100.00 |
| 08-Jan | Revenue | £ 2,100.00 | 03-Jan | Stationery | £ 95.00 |
| 15-Jan | Revenue | £ 1,330.00 | 05-Jan | Rent | £ 550.00 |
| 23-Jan | Revenue | £ 800.00 | 05-Jan | Prepaid Insurance | £ 360.00 |
| 31-Jan | Accounts Receivable | £ 2,660.00 | 19-Jan | Accounts Payable-ABC Ltd | £ 4,650.00 |
| 26-Jan | Drawings | £ 2,000.00 | |||
| 28-Jan | Prepaid Rent | £ 550.00 | |||
| 31-Jan | Balance | £ 3,585.00 | |||
| £ 16,890.00 | £ 16,890.00 | ||||
| Capital | |||||
| Date | Account | Amount | Date | Account | Amount |
| 01-Jan | Cash | £ 10,000.00 | |||
| 31-Jan | Balance | £ 10,000.00 | |||
| Total | £ 10,000.00 | Total | £ 10,000.00 | ||
| 31-Jan | Balance | £ 10,000.00 | |||
| Machinery | |||||
| Date | Account | Amount | Date | Account | Amount |
| 02-Jan | Cash | £ 5,100.00 | 31-Jan | Balance | £ 5,100.00 |
| Total | £ 5,100.00 | Total | £ 5,100.00 | ||
| 31-Jan | Balance | £ 5,100.00 | |||
| Inventory | |||||
| Date | Account | Amount | Date | Account | Amount |
| 03-Jan | Accounts Payable-ABC Ltd | £ 1,750.00 | 08-Jan | COGS | £ 1,500.00 |
| 18-Jan | Accounts Payable-ABC Ltd | £ 3,500.00 | 15-Jan | COGS | £ 950.00 |
| 12-Jan | Accounts Payable-ABC Ltd | £ 2,900.00 | 23-Jan | COGS | £ 3,200.00 |
| 16-Jan | COGS | £ 1,900.00 | |||
| Balance | £ 600.00 | ||||
| Total | £ 8,150.00 | Total | £ 8,150.00 | ||
| Balance | £ 600.00 | ||||
| Accounts Payable-ABC Ltd | |||||
| Date | Account | Amount | Date | Account | Amount |
| 19-Jan | Cash | £ 4,650.00 | 03-Jan | Inventory | £ 1,750.00 |
| 31-Jan | Balance | £ 3,500.00 | 12-Jan | Inventory | £ 2,900.00 |
| 18-Jan | Inventory | £ 3,500.00 | |||
| Total | £ 8,150.00 | Total | £ 8,150.00 | ||
| 31-Jan | Balance | £ 3,500.00 | |||
| Stationery | |||||
| Date | Account | Amount | Date | Account | Amount |
| 03-Jan | cash | £ 95.00 | 31-Jan | Balance | £ 95.00 |
| Total | £ 95.00 | Total | £ 95.00 | ||
| 31-Jan | Balance | £ 95.00 | |||
| Rent | |||||
| Date | Account | Amount | Date | Account | Amount |
| 05-Jan | Cash | £ 550.00 | 31-Jan | Balance | £ 550.00 |
| Total | £ 550.00 | Total | £ 550.00 | ||
| 31-Jan | Balance | 550 | |||
| Prepaid Insurance | |||||
| Date | Account | Amount | Date | Account | Amount |
| 05-Jan | Cash | £ 360.00 | 31-Jan | Insurance | £ 30.00 |
| 31-Jan | Balance | £ 330.00 | |||
| Total | £ 360.00 | Total | £ 360.00 | ||
| 31-Jan | Balance | 330 | |||
| Insurance | |||||
| Date | Account | Amount | Date | Account | Amount |
| 31-Jan | Prepaid Insurance | £ 30.00 | 31-Jan | Balance | £ 30.00 |
| Total | £ 30.00 | Total | £ 30.00 | ||
| 31-Jan | Balance | £ 30.00 | |||
| Revenue | |||||
| Date | Account | Amount | Date | Account | Amount |
| 31-Jan | Balance | 10570 | 08-Jan | Cash | 2100 |
| 15-Jan | Cash | 1330 | |||
| 16-Jan | Accounts Receivable | 2660 | |||
| 23-Jan | Accounts Receivable | 3680 | |||
| 23-Jan | Cash | 800 | |||
| Total | 10570 | 10570 | |||
| COGS | |||||
| Date | Account | Amount | Date | Account | Amount |
| 08-Jan | Inventory | £ 1,500.00 | 31-Jan | Balance | £ 7,550.00 |
| 15-Jan | Inventory | £ 950.00 | |||
| 23-Jan | Inventory | £ 3,200.00 | |||
| 16-Jan | Inventory | £ 1,900.00 | |||
| Total | £ 5,650.00 | Total | £ 7,550.00 | ||
| Balance | £ 7,550.00 | ||||
| Prepaid Rent | |||||
| Date | Account | Amount | Date | Account | Amount |
| 28-Jan | Cash | £ 550.00 | 31-Jan | Balance | £ 550.00 |
| Total | £ 550.00 | Total | £ 550.00 | ||
| Balance | £ 550.00 | ||||
| Telephone Expenses | |||||
| Date | Account | Amount | Date | Account | Amount |
| 31-Jan | Telephone Bill Payable | £ 35.00 | 31-Jan | Balance | £ 35.00 |
| Total | £ 35.00 | Total | £ 35.00 | ||
| Balance | £ 35.00 | ||||
| Telephone Bill Payable | |||||
| Date | Account | Amount | Date | Account | Amount |
| 31-Oct | Balance | £ 35.00 | 31-Jan | Telephone Expense | £ 35.00 |
| Total | £ 35.00 | Total | £ 35.00 | ||
| Balance | 35 | ||||
| Depreciation | |||||
| Date | Account | Amount | Date | Account | Amount |
| 31-Jan | Accumulated Depreciation | £ 85.00 | 31-Jan | Balance | £ 85.00 |
| Total | £ 85.00 | Total | £ 85.00 | ||
| Balance | £ 85.00 | ||||
| Accumulated Depreciation | |||||
| Date | Account | Amount | Date | Account | Amount |
| 00-Jan | Balance | £ 85.00 | 31-Jan | Depreciation | £ 85.00 |
| Total | £ 85.00 | Total | £ 85.00 | ||
| Balance | £ 85.00 | ||||
| Accounts Receivable | |||||
| Date | Account | Amount | Date | Account | Amount |
| 23-Jan | Revenue | £ 3,680.00 | 31-Jan | Cash | 2660 |
| 16-Jan | Revenue | £ 2,660.00 | |||
| Balance | £ 3,680.00 | ||||
| Total | £ 3,680.00 | Total | £ 6,340.00 | ||
| Balance | £ 3,680.00 | ||||
| Drawings | |||||
| Date | Account | Amount | Date | Account | Amount |
| 26-Jan | cash | 2000 | 31-Jan | balance | 2000 |
| Total | 2000 | Total | 2000 | ||
| Balance | 2000 | ||||
| Trial Balance as on 31st Jan 2019 | ||
| Account Name | Dr | Cr |
| Cash | £ 3,585.00 | |
| Inventory | £ 600.00 | |
| Prepaid Insurance | 330 | |
| Prepaid Rent | £ 550.00 | |
| Accounts Receivable | £ 3,680.00 | |
| Machinery | £ 5,100.00 | |
| Accumulated Depreciation | £ 85.00 | |
| Accounts Payable-ABC Ltd | £ 3,500.00 | |
| Telephone Bill Payable | £ 35.00 | |
| Capital | £ 10,000.00 | |
| Drawings | £ 2,000.00 | |
| Revenue | £ 10,570.00 | |
| COGS | £ 7,550.00 | |
| Telephone Expenses | £ 35.00 | |
| Depreciation | £ 85.00 | |
| Rent | 550 | |
| Insurance | £ 30.00 | |
| Stationery | £ 95.00 | |
| £ 24,190.00 | £ 24,190.00 | |
| Income Statement | |
| Revenue | £ 10,570.00 |
| COGS | £ 7,550.00 |
| Gross Profit | £ 3,020.00 |
| Less: Expenses | |
| Telephone Expenses | £ 35.00 |
| Depreciation | £ 85.00 |
| Rent | £ 550.00 |
| Insurance | £ 30.00 |
| Stationery | £ 95.00 |
| Net Income | £ 2,225.00 |
| Statement of Financial Position | ||
| Assets | ||
| Current Asset | ||
| Cash | £ 3,585.00 | |
| Inventory | £ 600.00 | |
| Prepaid Insurance | £ 330.00 | |
| Prepaid Rent | £ 550.00 | |
| Accounts Receivable | £ 3,680.00 | £ 8,745.00 |
| Non-Current | ||
| Machinery | £ 5,100.00 | |
| Accumulated Depreciation | -£ 85.00 | £ 5,015.00 |
| Asset | £ 13,760.00 | |
| Liabilities and Capital | ||
| Current Liabilities | ||
| Accounts Payable-ABC Ltd | £ 3,500.00 | |
| Telephone Bill Payable | £ 35.00 | £ 3,535.00 |
| Capital | ||
| Capital | £ 10,000.00 | |
| Less: Drawing | £ 2,000.00 | |
| Retained Earnings | £ 2,225.00 | £ 10,225.00 |
| Liabilities and Capital | £ 13,760.00 | |
Answer-2
| Statement of financial position as at 31 December: | |||
| 2018 | 2017 | ||
| £ | £ | ||
| Non-current assets | 35,000 | 54,000 | |
| Current assets | |||
| Cash at bank | 26,870 | 31,204 | |
| Inventory | 5,800 | 4,375 | |
| Trade receivables | 19,780 | 15,900 | |
| Total current assets | 52,450 | 51,479 | |
| Total assets | 87,450 | 1,05,479 | |
| Non-current liabilities | 23,000 | 26,000 | |
| Current liabilities | |||
| Trade payables | 14,500 | 9,780 | |
| Total liabilities | 37,500 | 35,780 | |
| Net Assets | 49,950 | 69,699 | |
| Equity | |||
| Share capital | 40,000 | 40,000 | |
| Retained earnings | 9,950 | 29,699 | |
| Total Equity | 49,950 | 69,699 | |
| Income Statement for the years ending 31 December: | |||
|
2018 |
2017 |
||
|
£ |
£ |
||
| Revenue |
2,24,250 |
2,10,375 |
|
| Cost of sales |
1,40,980 |
1,15,706 |
|
| Gross profit |
83,270 |
94,669 |
|
| Total expenses |
73,320 |
64,970 |
|
| Net profit |
9,950 |
29,699 |
|
| i | Gross Profit Margin= | Gross Profit/ Revenue |
| Gross Profit Margin(2018)= | 37% | |
| Gross Profit Margin(2017)= | 45% | |
| ii | Net Profit Margin= | Net Profit/ Revenue |
| Net Profit Margin(2018)= | 4% | |
| Net Profit Margin(2017)= | 14% | |
| iii | Current Ratio= | Current assets/ Current Liabilities |
| Current Ratio(2018)= | 3.62 | |
| Current Ratio(2017)= | 5.26 | |
| iv | Quick Ratio= | Quick asset/ Current liabilities |
| Quick Asset= | Cash+account recievable | |
| Quick Asset(2018)= | 46,650 | |
| Quick Asset(2017)= | 47,104 | |
| Quick Ratio(2018)= | 3.22 | |
| Quick Ratio(2017)= | 3.25 | |
| v | Trade Receivable days= | (Account Receivable/ total credit sales)x Number of days |
| Trade Receivable days(2018)= | 32 | |
| Trade Receivable days(2017)= | 28 | |
| vi | Trade Payable Days= | (Trade Payable/cost of sales)x365 |
| Trade Payable Days(2018)= | 38 | |
| Trade Payable Days(2017)= | 31 | |
| vii | Inventory Turnover days= | Ending Inventory/ cost of sales x 365 |
| Inventory Turnover days(2018)= | 15 | |
| Inventory Turnover days(2017)= | 14 |
Analysis of Performance of company from 2017 to 2018
- Company’s Revenue has increased in 2018 from 2017, so as the gross profit. But after analysis of Gross profit ratio, it can be depicted that the company is unable to make gross profit as high as in 2017, which may be because of increased inventory costs.
- Expenses of the company has increased from 2017 to 2018 which has again eaten up the gross profits of the company and resulted in a lower net profit in 2018 than in 2017, and net profit ratio has also decreased severely.
- Due to decrease in profitability, the liquidity of the company has also increased due to increased level of current liabilities, which has resulted in lower current ratio and quick ratio in 2018 than in 2017.
- Company is unable to collect its debtors in 2018 as fast as in 2017, which can be shown by the higher trade receivable days.
- Company has increased its trade payable days, due to which closing balance of accounts payable has increased in 2018 from 2017, which marks the inability of the company to pay its debt as fast as in 2017
- Inventory turnover days has increased in 2018 than in 2017 which shows that company has failed to plan the operations as efficient as in 2017.
Overall, from the ratio analysis and the financial statements it can be concluded that the company’s performance has been in a downward trend in 2018 from 2017.
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