Question Description

Question 1

Mark Davies has started a lawn mowing business (MD Lawnmowing) as a temporary job/business which he intends to run until he starts his business degree at the University of South Australia in five months. Mark has never owned or run a business before. To start the business on 1 March 2014, he deposited $2,200 into a new bank account opened in the name of the business. The $2,200 consisted of a $1800 loan from his father and $400 of his own money. Mark rented some equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns.

At the end of each month Mark sent invoices to his customers. On 31 July, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers.

At 31 July, Mark’s business account cheque book shows a balance of $1,880, and his customers still owe him $600. During the period, he collected $4,750 from customers. His cheque book lists payments for supplies totalling $480, and he still has fuel and supplies that cost a total of $50 on hand. He paid his employees $2,100, and he still owes them $300 for their final week of work. 

Mark rented some equipment from Kennard’s Hire. On 1 April, he signed a six-month rental agreement on lawnmowers and paid $720 for the full period. Kennard’s Hire will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Mark has kept the equipment in excellent condition. In fact during May paid $200 to repair one of the mowers.

To transport employees and equipment to jobs, Mark used a trailer that he bought for $450. He believes that the period’s work used up one-third of the trailer’s service potential. The business cheque book lists a payment of $520 for private cash withdrawals by Mark during the period. In July Mark paid back a third of the amount his father had lent to him. 

Mark estimates that he spent approximately 75 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from. 

Required

Prepare the business Income Statement for the period. 

(9 marks)

Prepare the classified Balance Sheet at the end of the period. 

(11 marks)

Was Mark’s venture successful? Give the reasons for your answer. 150 – 250 words only. 

(5 marks)

Total for Question 1: 25 marks

Question 2 

Question 4

You are provided the following financial information for Reliance Ltd:

RELIANCE  LTD

COMPARATIVE BALANCE SHEETS

AS AT JUNE 30

                                                                                2014            2013

Current Assets

Cash on Hand      $1500   $4000

Cash at Bank           -       1200

Accounts Receivable (net)       5200        4500

Inventory      20000    18000

Prepaid Expenses                 1650       28350    800         28500

Non Current Assets

Plant and Equipment      74000  64000

less Acc. Depreciation    (23000)       51000  17600         46400

Total Assets         79350                   74900

Current Liabilities

Bank Overdraft       5660                     -

Accounts Payable       4000                 3800

Accrued  Expenses           780                   790

Tax Payable                       720       11160         1200         5790

Non Current Liabilities

Bank Loan                     20000                     20000

Total Liabilities                   31160                     25790

Net Assets                   48190                        49110

Equity

Share Capital30000                       26000

Retained Earnings18190                       2311048190                       49110

 (continued over the page)

RELIANCE  LTD

INCOME STATEMENT

FOR THE YEAR ENDED JUNE 30, 2014

Net Sales$93000

Cost of Sales  54200

Gross Profit:  38800

Other Revenue:

Interest Revenue        60

Discount Received      400     460

39260

Expenses:

Selling & Admin Expense  19000

Doubtful Debts Expense                              200

Depreciation Expense      5400

Interest Expense    240027000

Profit before tax12260

Income tax expense  3378

Profit           $ 8882

Note: Bad debts written off during the year were $200

REQUIRED:

Answer this question on the separate question 3 pro forma provided.

Prepare a Statement of Cash Flow in the format required by the applicable accounting standard. Show all calculations in your answer.

[14 marks]

The owners of Reliance Limited cannot understand why there is such a difference between the profit for the period and the total cash flows. Briefly explain some of the factors causing this difference.

[2 marks]

What information is provided by a Statement of Cash Flow which is not provided by other Financial Statements? (ie: Income Statement, Balance Sheet and Statement of Changes in Equity)

[2 marks]

TOTAL FOR QUESTION 4: 18 Marks