£ £ Sales 2,465,000 Other operating income 25,000 Inventory at 1 December 2020 367,000 Purchases 1,245,000 Administration
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
The following is the
Debit Credit
£ £
Sales 2,465,000
Other operating income 25,000
Inventory at 1 December 2020 367,000
Purchases 1,245,000
Administration expenses 198,000
Distribution expenses 75,000
Marketing expenses 298,200
Salaries 412,000
Rent 25,500
Energy 15,300
Computer equipment - cost 405,000
Computer equipment - accumulated
Motor vehicles - cost 265,000
Motor vehicles - accumulated depreciation 146,000
Non-current investments 26,000
Receivables 388,000
Allowance for receivables 13,000
Payables 252,400
Cash and cash equivalents 250,200
Ordinary £1 shares 560,000
Share premium 26,000
5% debentures 76,000
Interim dividend paid 13,000
Suspense account 21,000
Total 4,004,200 4,004,20
The following information is relevant:
1. Closing inventory at 30 November 2021 is £375,000.
2. On further investigation of the suspense account in the trial balance above, it was discovered that a cash payment made on 1 July 2021 of £21,000 posted to the suspense account represents the cost of purchase of computer equipment.
3. Pyramid Ltd depreciates non-current assets as follows:
• computer equipment at 15 per cent on a straight line basis
• motor vehicles at 20 per cent on a reducing balance basis.
4. Depreciation is charged on a monthly basis. No depreciation for the year ended 30 November 2021 has been entered into the accounting records.
5. On 30 November 2021, Pyramid Ltd. decided to write off a trade receivable of £5,500 and to make an allowance for irrecoverable receivables of 3 per cent of the outstanding receivables at that date. No entries have been made in the
nominal ledger accounts.
6. A full year’s debenture interest is to be accrued.
7. Energy costs have been paid up to 30 September 2021. The next invoice
covering the period 1 October 2021 to 31 December 2021 is expected to be for
about £5,200.
8. On 1 July 2021 Pyramid Ltd paid £17,000 for rent to cover the period 1 July
2021 to 31 December 2021.
9. For the financial year ended 30 November 2021, corporation tax is estimated to be £27,800 and the audit fee is estimated to be £8,000.
10. Pyramid Ltd allocates expenses as follows:
• depreciation on motor vehicles is allocated to distribution expenses
• depreciation on computer equipment is allocated to administration expenses
• salary is allocated 80% to administration and 20% to distribution expenses
• energy expenses are allocated 70% to administration and 30% to distribution
expenses
• rent is allocated to administration expenses
Required:
Prepare an income statement for the year ended 30 November 2021 and a balance sheet as at 30 November 2021 for Pyramid Ltd
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