Income Statement for Billy Bristol - Assignment Example

Question 1 Billy Bristol Income Statement for the Period Ended 30th June 2014 $ $ Revenues 13,560 Less; Purchases (3,700) Gross Profits 9,860 Expenses: Wages and salaries 2,400 Sundry expenses 127 Rental Expenses 1,200 Maintenances & Repairs 300 Transportation (calculation 1) 100 Telephone (Calculation 2) 189 (4,316) Net Income 5,544 Calculations; Calculation 1; Transportation expenses= (5%*2000) = 100 Calculation 2; Telephone expenses= 70%*270=189 Billy Bristol Statement of Changes in Equity for the Period Ended 30th June 2014 Capital Retained Earnings Total Equity Balance at 1st May 2014 1,500 - 1,500 Changes in equity for the year ending 2014 Issue of additional capital 1,500 1, 500 Income for the year 5,544 5, 544 Balance as at 30th June 2014 7,044 1,500 8,544 Billy Bristol Balance Sheet at the End of the Period $ Current assets; Bank 3,000 Cash 260 Inventories 450 Total current assets 3,710 Non-current assets: Van 2,000 (Tools and equipment) $ 2,400 Total non-current assets 4,400 Total Assets 8,110 Current Liabilities: Borrowings 1,500 Provisions 1,500 Accruals 570 Total Liabilities 3,570 Net Assets 4,540 Equities Capital 3,000 Less: drawings (2,121) Income for the year 5,544 Total Equity 6,423 It can be seen that Billy makes; (25*40*4*6months) $24,000 while in employment while he only makes $5,544 as profits and an equity base of about 6,423 within the same period. This technically means that Billy is better placed working for someone else than engaging in the business. Question 2 The owners should understand that cash reflects the cash balances at any given moment in time and their respective records are maintained at the cash at bank ledger while profits is only reflected within the statement of financial performance and uses both revenues and expenses for computation purposes (Marshall, McManus & Viele, 2008). Furthermore, the owner should understand that not all cash receipts are revenues and also, not all cash payments reflect expenses of the business for that matter. This is ascertained to the fact that; first, cash statements only involves cash inflows and outflows, which are cash coming and going out of the business at any given moment. Second, it should be comprehended that not all cash, whether coming in or going out reflect revenues or expenses (Marshall, McManus & Viele, 2008). Third, all of a business revenue base does not necessary mean cash receipts and all expenses do not necessary depict payments. Fourth, profits equal revenues less expenses while cash balance is only reflected by lessening cash inflow to the cash outflows (Marshall, McManus & Viele, 2008). Question 2(b) A good example of the cash received that are not depicted as revenue for the business is the amount depicted as prepaid revenues, which is revenues that are received in advance. This are categorized as liabilities and not as revenues. Cash received from the business debtors are cash received but cannot be recognized as revenues because they reflect asset-base (Marshall, McManus & Viele, 2008). Some of the cash payments that cannot be depicted as expenses within the company’s income statement include loan repayment values that are categorized as liabilities and an amount used to purchase a non-current asset, which is depicted as an asset to the company rather than as an expense item (Marshall, McManus & Viele, 2008). Question 3 Date Details Debit Credit A Cash 6,00 Interest Expense 6,00 B Vehicles Expenses Account 840 Personal Drawings 840 C Cash Account 2,000 Commission expense 2,000 D Sundry Expenses Account 1,300 Office furniture 1,300 E Cash Account 1,350 Rent Account 1,350 F Insurance Fees Accounts 720 Prepaid insurance Account 720 G Repairs and Maintenance Account 11,000 Buildings 11,000 H Buildings 16,000 Depreciation Account 16,000 Office Furniture & Equipment 4,000 Depreciation Account 4,000 Question 3(b) A. The introduction of interest expense of the amount $600 will cause a decrease in the profit figure of $63,500: ( 63,500-600=$62,900) B. The personal repairs to Michael’s motor vehicle will increase the profit figure by $840. C. The commission amounts amounting $2,000 will reduce the profit figure since they’d be included within the expenses section of the income statement where they are lessened from gross profits. D. The incorrect debit of the sundry expenses accounts will led to an increase in the profit figure by $1,300. This is because the figure will have to be eliminated from the expenses section of the income statement. E. Rent from customers that is included when included will result to an increase in the profit figure by the $1,350 since the rental income is treated as revenues for the company. F. The elimination of the insurance premium and the payment of the annual premium will result to a increase in the profit figure since it will be eliminated from the expenses section of the income statement. G. The failure to recognize depreciation expenses for the period will not have an influence on the profitability figure given that depreciation is an item that is affected within the balance sheet of a company and not income statement. Question 4 A) Gross profit margin= (Sales-COGS)/ Sales For Brisbane Ltd; (260,000-161,000)/260,000*100%= 38.08% For Perth Ltd: (415,000-311,000)/415,000*100%=25.06% B) Profit margin=net income/sales For Brisbane Ltd; (17,500/260,000)*100%=6.73% For Perth Ltd: (17,500/415,000*100%=4.22% C) Return on Assets=net income/total assets For Brisbane Ltd: (17,500/170,000)*100%=10.29% For Perth Ltd: (17,500/195,000)*100%=8.97% D) Current ratio=current assets/current liabilities For Brisbane Ltd: 73,000/20,000=3.65:1 For Perth Ltd: 70,000/24,000=2.92:1 E) Quick ratio = (current assets-inventories)/current liabilities For Brisbane Ltd: (73,000-30,000)/20,000= 2.15 For Perth Ltd: (70,000-20,000)/24,000=2.08 F) Receivable Turnover= accounts receivable/sales For Brisbane Ltd: 35,000/260,000=0.13 For Perth Ltd: 24,000/415,000=0.06 E) Inventory Turnover=sales/inventories For Brisbane Ltd: 260,000/30,000=8.67 For Perth Ltd: 415,000/20,000= 20.75 Question 4(b) From the calculations above, it can be seen that the two companies depict different ratios throughout the year. In regards to profitability ratios, it can be noted that; first, the gross profit margin for Brisbane Ltd stands at 38.08% while for Perth Ltd is placed at 25.06% at the end of the 2013 financial year. This depicts that Brisbane is far much positioned in respect to be able to pay for its operational expenses and at the same time yield substantial level of profits in comparison to Perth Ltd. Second, in regards to profit margin, Brisbane Ltd stands at 6.73% while Perth Ltd ratio stands at 4.22%. This is an indication that Brisbane Ltd has a higher profitability level and also, has control of its immediate costs in comparison to Perth Ltd. Third, the return on assets for Brisbane Ltd stands at 10.29% and for Perth Ltd is positioned at 8.97%. This is an indication that the Brisbane Ltd is able to utilize the size of its asset-base to generate substantial level of profits at any given moment in time. This basically means that Brisbane Ltd is far much profitable in comparison to the immediate counterpart: Perth Ltd. In regards to liquidity, the ratios are also analyzed as follows; first, the current ratio for Brisbane and Perth Ltd stands at 3.65 and 2.92 respectively. This is an indication that Brisbane is able to meet its short-term commitments as they fall due in a timely fashion in comparison to Perth Ltd. Second, the quick ratio for both Brisbane and Perth Ltd stands at 2.15 and 2.08 respectively. This is an indication that Brisbane Ltd is far much positioned in respect to meeting its short-term financial commitments in a timely fashion without relying on the immediate level of inventories. Third, receivables turnover for Brisbane and Perth Ltd stands at 0.13 and 0.06 respectively. The higher ratio for Brisbane Ltd is a likely indication that the company has devised effective trading policies that fasten the collection of goods sold on credit in comparison to Perth Ltd. Fourth, inventories turnover ratio for Brisbane and Perth Ltd stands at 8.67 and 20.75 respectively. This means that Brisbane, unlike Perth Ltd, is able to translate inventories into sales in less number of days. In general, the liquidity position for Brisbane Ltd is far much stable in comparison to Perth Ltd. (394 words) References List Marshall, DH, McManus, WW& Viele, DF.(2008). Accounting: what the numbers mean 8thEd. McGraw-Hill/Irwin, New York. Read More