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.
Prepare the business Income Statement for the period.
Prepare the classified Balance Sheet at the end of the period.
Was Mark’s venture successful? Give the reasons for your answer. 150 – 250 words only.
Total for Question 1: 25 marks
You are provided the following financial information for Reliance Ltd:
COMPARATIVE BALANCE SHEETS
AS AT JUNE 30
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
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
Share Capital30000 26000
Retained Earnings18190 2311048190 49110
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FOR THE YEAR ENDED JUNE 30, 2014
Cost of Sales 54200
Gross Profit: 38800
Interest Revenue 60
Discount Received 400 460
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
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.
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.
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)
TOTAL FOR QUESTION 4: 18 Marks