Week 3 - Tutorial 2 Flashcards
- What are the main functions of a statement of financial position?
• The statement of financial position shows:
• the resources of the business (assets)
• and how they have been financed (equity and
liabilities)
• Can be used to assess the financial strength and
weaknesses of a business
- You are given the following simplified statement of financial position of the Hackin Company as at 30 June year 9. (Available page 1 Tutorial 2 on canvas)
£000 Non Current Assets 250 Current Assets Inventory 60 Receivables 40 Cash 120 Total Current Assets 220 Total Assets 470
Current Liabilities
Payables 100
Equity
Share capital 250
Retained earnings 120
370
Equity and liabilities 470
a. Calculate the company’s current ratio and acid test (quick) ratio.
Current ratio = Current assets/Current liabilities
= 220/100 = 2.2
Acid test ratio = Current assets less inventories/Current liabilities
= (220 - 60)/100 = 160/100 = 1.6
- You are given the following simplified statement of financial position of the Hackin Company as at 30 June year 9. (Available page 1 Tutorial 2 on canvas)
£000 Non Current Assets 250 Current Assets Inventory 60 Receivables 40 Cash 120 Total Current Assets 220 Total Assets 470
Current Liabilities
Payables 100
Equity
Share capital 250
Retained earnings 120
370
Equity and liabilities 470
b. The following transactions take place during July year 9:
i. New plant and equipment are bought for £80,000, and payment is made in cash.
ii. Additional inventories of goods are bought for £15,000. It is agreed that they will be paid for in August.
Prepare a revised statement of financial position
Revised Statement of Financial Position as at 31 July Year 9
£000 Non Current Assets 330 Current Assets Inventory 75 Receivables 40 Cash 40 Total Current Assets 155 Total Assets 485
Current Liabilities
Payables 115
Equity
Share capital 250
Retained earnings 120
370
Equity and liabilities 485
(Step by step changes and calculations made on page 7 and 8 of week 2 tutorial document on canvas)
- You are given the following simplified statement of financial position of the Hackin Company as at 30 June year 9. (Available page 1 Tutorial 2 on canvas)
£000 Non Current Assets 250 Current Assets Inventory 60 Receivables 40 Cash 120 Total Current Assets 220 Total Assets 470
Current Liabilities
Payables 100
Equity
Share capital 250
Retained earnings 120
370
Equity and liabilities 470
Current ratio = Current assets/Current liabilities
= 220/100 = 2.2
Acid test ratio = Current assets less inventories/Current liabilities
= (220 - 60)/100 = 160/100 = 1.6
b. The following transactions take place during July year 9:
i. New plant and equipment are bought for £80,000, and payment is made in cash.
ii. Additional inventories of goods are bought for £15,000. It is agreed that they will be paid for in August.
Revised Statement of Financial Position as at 31 July Year 9
£000 Non Current Assets 330 Current Assets Inventory 75 Receivables 40 Cash 40 Total Current Assets 155 Total Assets 485
Current Liabilities
Payables 115
Equity
Share capital 250
Retained earnings 120
370
Equity and liabilities 485
c. How do these transactions affect the current ratio and acid test (quick) ratio?
Current ratio = Current assets/Current liabilities
= 155/115 = 1.348
Current Ratio in previous year was 2.2, so it has declined.
Acid test ratio = Current assets less inventories/Current liabilities
= (155-75)/115 = 80/115 = 0.695
Liquidity Ratio in the previous year was 1.6, so it has worsened.
- You are given the following simplified statements of financial position of the
Port Andrew Company and the Port Edward Company as at 31 December year 1. (Page 2 tutorial 2 week 3)Port Andrew Port Edward £000 £000 Non Current Assets Tangible assets Freehold premises (at cost) 100 200 Plant (at cost less depreciation) 200 100 Vehicles (at cost less depreciation) 100 100 400 400 Investments 200 30 600 430 Current Assets Inventory 70 40 Receivables 50 90 Cash 10 60 Total Current Assets 130 190 Total Assets 730 620
Current Liabilities
Trade Payables 70 80
Non Current Liabilities
10% debentures 300 100
Total Liabilities 370 180
Equity
Share capital 300 300
Retained earnings 60 140
360 440
Equity and liabilities 730 620
During year 1 the operating profit of the Port Andrew Company amounted to £61,000 and the operating profit of the Port Edward Company amounted to £40,000.
Which of the two companies appears to be the financially weaker, and why? You should calculate the current ratio, the acid test (quick) ratio, the gearing ratio
and the interest times cover.
Port Andrew
Current Ratio = Current Assets/ Current Liabilities = 130,000/70,000 = 1.86
Acid Test Ratio = Current Assets less Inventories/Current Liabilities
= (130,000 – 70,000)/70,000 = 0.86
Gearing Ratio = Long-term Borrowings/(Long-term Borrowings + Equity)
= 300,000/(300,000 + 360,000) = 0.4545 x 100= 45%
During year 1 the operating profit of the Port Andrew Company amounted to £61,000
Interest is 10% of 300,000 = £30,000
Interest Coverage = Profit/Interest = 61,000/30,000 = 2.03
Port Edward
Current Ratio = Current Assets/ Current Liabilities =
190,000/80,000
= 2.38
Acid Test Ratio = Current Assets less Inventories/Current Liabilities
= (190,000 – 40,000)/80,000
= 1.88
Gearing Ratio = Long-term Borrowings/(Long-term Borrowings + Equity)
= 100,000/(100,000 + 440,000)
= 0.185 x 100= 18.5%
During year 1 the operating profit of the Port Edward Company amounted to £40,000.
Interest is 10% of 100,000 = £10,000
Interest Coverage = Profit/Interest = 40,000/10,000= 4.0
Port Andrew Port Edward Current Ratio 1.86 2.38 Liquidity Ratio 0.86 1.88 Gearing Ratio 45% 18.5% Interest Times Cover 2.03 4.0
Port Edward is stronger financially. All its ratios are better.
- You are given the following simplified statement of financial position of the Whiting Company as at 31 August year 6: (Page 3 tutorial 2 week 3)
£000 Non Current Assets 350 Current Assets Inventories (at cost) 90 Trade Receivables 80 Cash 30 200 Total Assets 550
Current Liabilities
Trade Payables 130
Equity
Share capital 380
Retained earnings 40
420
Total Equity and liabilities 550
a. The following transactions took place in September year 6. Show how each would affect the statement of financial position.
i. A new machine costing £10,000 was purchased and paid for in cash.
ii. Inventories, which had cost £50,000, were sold to Mrs Fish for £90,000 and paid for immediately in cash.
iii. £30,000 was received from, debtors, which were shown as ‘receivables’ on the statement of financial position.
i) non-current assets = +10
cash = -10
ii) inventories = -50
cash = +90
retained earnings = +40
iii) trade receivables = -30
cash = +30
- You are given the following simplified statement of financial position of the Whiting Company as at 31 August year 6: (Page 3 tutorial 2 week 3)
£000 Non Current Assets 350 Current Assets Inventories (at cost) 90 Trade Receivables 80 Cash 30 200 Total Assets 550
Current Liabilities
Trade Payables 130
Equity
Share capital 380
Retained earnings 40
420
Total Equity and liabilities 550
The following transactions took place in September year 6.
i. A new machine costing £10,000 was purchased and paid for in cash.
ii. Inventories, which had cost £50,000, were sold to Mrs Fish for £90,000 and paid for immediately in cash.
iii. £30,000 was received from, debtors, which were shown as ‘receivables’ on the statement of financial position.
b. Show how the statement of financial position would appear after these transactions have been recorded.
£000
Non Current Assets 360
Current Assets
Inventories (at cost) 40
Trade Receivables 50
Cash 140
230
Total Assets 590
Current Liabilities
Trade Payables 130
Equity
Share capital 380
Retained earnings 80
460
Total Equity and liabilities 590
Statement of Financial Position Problem
Jack Munroe decides to set up his own business importing raw material from the Republic of Ireland and converting this into products for resale. During the first six months of the business the following transactions take place:
1. He puts £50,000 of the money he obtained from an inheritance into the business.
2. He borrows a further £50,000 from an aunt who has just retired and wants to invest some of the lump sum from her pension into a business.
3. He intends to deliver the products to his customers and buys a second-hand van for £15,000.
4. A friend of his, who is an accountant, estimates that the van will depreciate by £1,500 a year.
5. He orders £80,000 of raw materials from a firm in Drogheda. The agreement is that he will pay £10,000 a month for these materials.
6. He intends not to employ any staff for the first year of operations but will pay himself £2,500 a month.
7. He leases a small business unit in Lisburn for £300 a month, however he has to pay a year’s rent in advance.
8. All other expenses will be paid in the month they occur and will equate to £400 a month. However, one utility bill for a quarter, and coming to £300, will not arrive until the start of the second six months of operation, so he will be paying this in arrears.
9. In the first six months he uses £70,000 of the raw materials and sells the associated products for £120,000. All sales are for cash, apart from £5,000
worth of products sold to a major customer at the end of the six-month period, who will pay him in the following month.
Required
From the above, draw up Jack Munroe’s statement of financial position for the first six months of operations.
Solution
Statement of Financial Position for Jack Munroe as at
xx xx xxxx
£ £
Non-current assets
Van (less depreciation) 14,250
Current assets
Inventory 10,000
Trade receivables 5,000
Prepayment 1,800
Bank 119,300 136,100
Total assets 150,350
Capital and reserves
Share capital 50,000
Less Drawings (15,000)
Plus Profit for the half year 45,050 80,050
Long-term liabilities
Loan 50,000
Current liabilities
Trade payables 20,000
Accrual 300 20,300
Total liabilities 150,350
Workings
Cash = £100,000 (original money) + 115,000 (sales) - £15,000 (van) - £60,000 (purchases) - £15,000 (drawings) - £3,600 (rent) - £2,100 (expenses) = £119,300
Profit = £120,000 (sales) - £70,000 (purchases) - £750 (depreciation) - £1,800 (rent) - £2,400 (expenses) = £45,050
Statement of Financial Position
(Balance Sheet)
Extra Question (week 4)
Packmore Foundry Plc is a quoted company with an authorised share capital of £250,000. The company prepares its accounts as at 31st March each year, and the trial balance, before final adjustments, extracted on 31st March 2017 showed
£000 £000 Ordinary share capital, issued and fully paid 200 Retained profits as on 1st April 2016 61 Long term loan 60 Leasehold factory: Cost at beginning of year 200 Accumulated depreciation at beginning of year 76 Plant and machinery: Cost at beginning of year 80 Accumulated depreciation at beginning of year 30 Additions 10 Trade payables and accrued expenses 170 Inventory as at 31st March 2017 160 Trade receivables 100 Prepayments 80 Bank 90 Profit for year (subject to adjustments) 111 Sale proceeds of plant \_\_\_\_\_\_\_\_\_\_ 12
720 720
You are also given the following information:
• The long term loan of £60,000 is repayable in six equal annual amounts starting on 1st April 2017
• Annual depreciation is calculated as follows:
• Leasehold factory - 2% straight line
• Plant and machinery - 20% reducing balance
• Plant was disposed of during the financial year that originally cost £16,000. The accumulated depreciation at the time of the sale was £3,200 for this plant.
Required
Prepare the statement of financial position as at 31st March 2017
Calculations
• As one of the six equal instalments of the loan repayments will take place in the forthcoming year it is a current liability
• Therefore £10,000 will go in current liabilities and £50,000 will go in non-current liabilities
• Plant was valued at £80,000 at the beginning of the year, however since then £16,000 worth of plant has been sold and £10,000 has been purchased
• The accumulated depreciation for the plant at the beginning of the year was £30,000, but £3,200 can now be written off as it was related to the plant that was sold
• Therefore the plant at cost is now £74,000 and the accumulated depreciation is £26,800
• This gives us a net book value of £47,200, which can now be depreciated by £9,440 (20%)
• The £9,440 will reduce the stated profit figure
• The leasehold factory needs to be depreciated by 2% at cost, i.e. £4,000
• This £4,000 will also reduce the stated profit
• We must finally consider the sale of the plant
• It was worth £16,000 - £3,200, i.e. £12,800, but was sold for £12,000
• Therefore a loss of £800 was made on the sale of the plant, which will also reduce the stated profit
• The stated profit is therefore adjusted:
• £111,000 – (£9,440 + £4,000 + £800) = £96,760
• We can now ignore the entry ‘Sale proceeds of plant’ as it will be dealt with in the adjusted figures for the plant, the plant’s accumulated depreciation and the adjusted profit
• We can now draw up the statement of financial position for Packmore Foundry Plc
Statement of Financial Position for Packmore Foundry Plc as at 31st March 2017
Non-current assets £ £
Leasehold Factory 120,000
Plant and Machinery 37,760 157,760
Current assets
Inventory 160,000
Trade receivables 100,000
Prepayments 80,000
Bank 90,000 430,000
Total assets 587,760
Capital and reserves
Ordinary share capital 200,000
Retained profit 157,760 357,760
Non-current liabilities (long term loan) 50,000
Current liabilities
Trade payables and accrued expenses (including loan)
180,000
587,760
Workings
• Leasehold factory = £200,000 less accumulated depreciation of £80,000
• Plant and machinery = £74,000 less accumulated depreciation of £36,240
• Retained profit = £61,000 plus adjusted profit of £96,760
• Trade payables and accrued expenses = £170,000 plus the £10,000 loan repayment due in within a year
