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Answers to Exercises

Chapter 2

Exercise 2.1

The types of assets held are shown in Table A2.1.

TABLE A2.1

BUSINESS ASSETS Ice cream Building Fairground ride manufacturer society operator

Stock of ice cream Building Caravan

Machinery

Computer Ride

Refrigerator

Photocopier

Stock of tickets

Exercise 2.2

Table A2.2 lists the assets found in the Koo1Kur1s hairdressing salon, sorted into fixed and current. TABLE A2.2

KOOLKURLS HAIRDRESSING SALON

FIXED

AND CURRENT ASSETS

Set of professional styling scissors

Shampoo

Electric

hairdryers

Electronic till

£10 owed by a customer £15 in the till

Fixed

Current

Fixed Fixed

Current

Current

231

ExerciseU

The following is an assessment of the liabilities of Paws&Ciaws

Petshop:

• £50 wages of Lenny, the part-time shop assistant, for work he did during the previous week

This is

listed as a prepayment under the heading Current

Liabilities. It

is for work that has already been completed, that means the business has had the benefit of that work. Now the business owes this to Lenny and must pay him in the short run. • £300 owed to the wholesaler for cages and petfood purchased and delivered last month This is listed as a trade creditor under Current Liabilities. The business has already received the goods and therefore potentially had the benefits, but still owes the £300 to the supplier, which must be paid in the short run. • £15 for stationery ordered but not yet delivered This is not a Current Liability as the business has not yet received any benefit, neither have the goods been delivered nor has an invoice been received. • £300 overdraft facility agreed with the bank manager but not yet used.

232 ANSWERS TO EXERCISES

This is not a Current Uability, as none of the potential benefit agreed has been made use of. An overdraft only becomes a liability when it is actually used and only to the extent to which it is used.

Exerdse 2.4

"Explanation The capital of £82 000 represents the value of the owner's original investment in the business. This has long been spent on computer equipment, vans, stock of goods for resale and other things and at the balance sheet date only £2000 of the net worth of the business Is actually represented by cash.

However, that does not mean that the rest

of the money has been wasted.

It is not really gone. It has just taken on a

different form, that of the various assets.

Figure A2.1 shows

the balance sheet as at 5 March 199X.

FIGURE A2.1

ALLIED DOMECO PLC

BALANCE SHEET AS AT 5 MARCH 199X

Fixed Assets

Buildings

Plant and Machinery

Furniture and Fittings

Current Assets

Stock

Debtors

Cash

Creditors: due within one year

Trade Creditors

Net Current Assets

Total Assets

less Current Liabilities

Creditors: due after one year

Long-term Bank Loan

Capital

Share Capital

Retained Profit

£m 1000
1000
150
2150
1700
£m 2400
1300
300
4000
450
(1)

4450 (2)

2700

1750 (3)

1500
250
1750

Explanation

(1) Net current assets= Current assets -

Creditors (due within one year)

(2) Total assets less Current liabilities = Fixed assets +

Current assets -Creditors (due within one year)

(3) This is the Net assets figure. Net assets = Fixed assets + Current assets -Creditors (due within one year)-Creditors (due after one year)

There is a

new entry 'Creditors: due after one year £1 000' on the balance sheet. This is matched by a £1000 increase in the 'Bank and cash' entry. (b) The correct answer is (D). The entry for 'Stock' has increased by £1000. This is matched by a corresponding increase of £1000 in the entry under 'Trade

Creditors'.

(c) The correct answer is (C).

Explanation

The entry for 'Stock' decreases by £1000. At the same time, the entry for 'Bank and cash' increases by £1500. The surplus is shown in the capital section as 'Retained profit' £500.

Chapter 3

Elerdse 3.1

The completed cash flow statement is shown in Figure A3.1.

FIGURE A3.1

JONATHAN S S'iVEETS

CASH FLOW 1 MAY TO 31 MAY 199X

Opening Balance 50

Receipts

Cash

Sales 1100

Payments

New

Supplier 500

Rent Warehouse 300

Wages Staff 360

Salary

Director 500

Closing Balance (510)

Stakeholder group Benefit

Customers If the business holds sufficient cash, it can make sure there is enough ice cream in stock Staff

The wider

community

If the business makes sufficient

profit, it can invest in developing new exciting flavours

If the business holds sufficient cash, it

can pay staff promptly

If the business makes sufficient

profit, it can offer good benefits, for instance pensions and private health insurance

If the business holds sufficient cash, it

can meet its bills for rates promptly

If the business makes sufficient

profit, it can afford to support local charities The completed profit and loss account is shown in Figure A3.2.

ANSWERS TO EXERCISES 233

FIGURE A3.2

JONATHAN S SWEETS PROFIT AND LOSS

ACCOUNT 1 MAY TO 31 MAY 199X

Sales 2600

Cost of Goods Sold 1100

Gross Profit 1500

Expenses

Rent 300

Wages Staff 360

Salary

Director 500

Trading Profit 340

(a) The correct answer is (C). The calculations are shown in Figure A3.3.

FIGURE A3.3

JANINE SWIFTS DRIVING SCHOOL CASH FLOW

STATEMENT 1 SEPTEMBER TO 3 SEPTEMBER 199X

Opening

Balance 300

Receipts

Sale of Highway Code 10

Cash for Lessons 100

Payments

Purchase

of Highway Code 5

Petrol 55

Advertisement 15

Closing Balance 335

(b) The correct answer

Is (B).

The calculations are shown in Figure A3.4.

FIGURE A3.4

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