Case Scenario1 – Hien
Hien is in business selling high quality glassware to retailers. Her accountant prepares a statement of financial position each year following Hien’s year end of 31 December. It is now 30 June 20X3. Hien, who has no knowledge of accounting, asks you for some assistance:
‘I know you’re studying accountancy and I’ve got a little exercise for you. The situation is this: I seem to be doing really well if the bank account is anything to go by. At over £62,000 the balance is higher than it’s ever been before. I’m wondering if I can actually spend this money. I don’t need it for myself but I’m thinking about buying some shares in the glass company which supplies a lot of the goods I sell. Could you possibly draw up a statement of financial position for me for the end of June and let me know whether the business is really looking as
healthy as I think it is?’
Hien supplies the following list of balances at 30 June, prepared by her book-keeper.
£
Capital 151,068
Trade payables 25,471
Cash at bank 62,479
Inventory 18,961
Trade receivables 14,371
Non-current assets – premises 74,450
Non-current assets – other 12,266
Amounts owed to HMRC 5,988
Questions: (indicative wordcount 150 words)
a) Prepare the statement of financial position at 30 June 20X3.
b) Discuss Hien’s cash position. Is there any other information which might be useful to you in order to give her good advice?
Case Scenario 2-Wazir
A friend, Wazir, has asked you for advice because he understands very little about accounting statements. His accountant has prepared the following summary of the last three years results of Wazir’ shoe business:
20X6 20X5 20X4
£ £ £
Revenue 286,860 256,496 260,241
Cost of sales 193,458 172,188 174,841
Gross profit 93,402 84,308 85,400
Expenses:
Premises costs (23,298) (16,277) (16,141)
Staffing costs (18,265) (18,203) (16,279)
Administration cost (10,761) (10,240) (10,186)
Net profit
Wazir tells you that in the early months of 20X5 a discount shoe operation opened near his shop. His sales suffered at first because of the competition, but after about 8 months the rival went out of business. Wazir decided, however, that he had better extend the range of inventory carried and also increase the floor area of the selling space so as to build up revenue. Since the end of 20X5 he has rented additional showroom and storage space from the business next door.
Wazir would like you to explain to him the impact of these events on his business performance.
Questions: (indicative wordcount 280 words)
a) Calculate his gross and net profit margins and
b) Write a brief report.
Case Scenario 3 -Modupe
Modupe runs a manufacturing business. Some of her products are manufactured under a licence which was granted on 1 January 20X2. Modupe paid £10,000 for the licence which runs for five years. She is amortising the cost of the licence at the rate of 20 per cent each year for five years.
On 1 March 20X4, Modupe bought a new machine for £18,000. The machine replaced another machine which had been fully depreciated, and which was scrapped on 28 February 20X4. Machinery and most other non-current assets are depreciated on a straight-line basis over 10 years.
There were no other purchases or sales of non-current assets.
Modupe tells you, her financial adviser, that she is worried that the cash at bank figure has fallen by such a large amount since the start of her financial year. She wonders if she should have made the investment in buying a new machine.
Modupe’s statement of profit or loss for the year ended 31 May 20X4 was as follows:
£ £
Revenue 3,777,242
Cost of sales
Opening inventory 303,638
Add: goods manufactured 3,006,162
3,309,800
Less: closing inventory (314,447)
(2,995,353)
Gross profit 781,889
Expenses (885,960)
Interest paid (5,000)
Loss for the year
Depreciation of £57,756 is included in expenses. Depreciation of £107,775 is included in cost of goods manufactured. This includes the amount charged to depreciation in respect of the new machine. Amortisation of £2,000 in respect of the patent is also included in cost of goods manufactured.
Modupe’s statements of financial position at 31 May 20X4 and 20X3 were as follows:
20X4 20X4 20X3 20X3
£ £ £ £
ASSETS
Non-current assets 1,745,500 1,895,031
Current assets
Inventory 314,447 303,638
Receivables 484,393 455,660
Cash at bank 2,880 37,446
CAPITAL AND LIABILITIES
Capital
Capital brought forward 2,169,331 2,198,061
(Loss)/profit for the year (109,071) 1,270
Drawings (96,000) (30,000)
1,964,260 2,169,331
Non-current liabilities
Long-term loan 150,000 142,000
Current liabilities
Payables 432,960 380,444
2,547,220
2,691,775
Questions: (indicative wordcount 480 words)
a) Prepare Modupe’s statement of cash flows for the year ended 31 May 20X4.
b) Write a brief report to Modupe explaining the reasons why the cash at bank balance has fallen during the year. Advise her on any actions she could take to improve the cash position.
Case Scenario 4 -Caroline
Caroline is starting an art gallery business in part of a converted mill building. She sold her house, making £40,000 profit on the transaction, and she is planning to put the money she has made into the new venture. £30,000 was used as a deposit on the purchase of her space in the mill, and she obtained a commercial mortgage of £118,000 for the remainder of the purchase price. The interest rate on the mortgage is 5.7 per cent and Caroline has negotiated a deal with the lender whereby she does not have to start paying off the capital sum until the third year of her business operation. The monthly interest only payments are £561.
Caroline will stage one exhibition each month, and her plans for the first three months of her business are as follows:
January – exhibition of prints by major European artists of the 20th century. Caroline expects to sell about 50 per cent of the exhibits, which would produce total sales of £52,000, the cash received immediately. £36,000 of this would be payable to the owner of the prints in February.
February – exhibition of the work of five sculptors. Working, again, on the expectation that 50 per cent of the work will sell, total sales are likely to be £48,000. Caroline will retain one third of this sum; the balance will be paid to the artists in March.
March – exhibition by renowned artist, Pasha Quigley. Pasha rarely exhibits his work and it is a major coup for Caroline to have his paintings on show. Caroline expects to sell £85,000 of work, of which she will retain commission of £20,000. The £85,000 will be received from purchasers within the month of March, and Pasha will be paid in April.
Expenses include the following:
1. Cost of exhibition catalogues. A catalogue for each exhibition will cost £5,000 to produce. The catalogue for the first exhibition will have been paid for in December out of Caroline’s remaining £10,000. The catalogues for the second and third exhibitions will also be paid for one month in advance.
2. Gallery premises costs. Business rates are to be paid monthly; the cost is £750 per month. Electricity costs will average out at £60 per month and Caroline expects to receive a bill for the first three months’ electricity in March, and to pay it in April.
3. Wages. Caroline will pay a part time assistant £550 per month.
4. Other expenses. Caroline estimates that a total of £1,000 in other expenses will be paid each month.
5. Drawings. She plans to draw £700 per month in cash.
6. Private view expenses. In each of the three months Caroline will have to spend an estimated £450 on buying in wine and other refreshments for the private view. This figure also includes the cost of hourly-paid waiting staff to take drinks round to guests.
7. Advertising. The initial round of press adverts will appear in December, and the £3,000 cost will be paid for out of Caroline’s remaining £10,000. Each month £400 will be paid for brochures and postage costs to send out to people on the gallery’s mailing list.
The bank balance at 1 January 20X4 will be £2,000 after advertising and catalogue costs have been paid for. The advertising and catalogue costs form part of Caroline’s start-up capital.
The gallery premises are to be depreciated over 25 years on the straight-line basis, with an assumption of nil residual value.
Questions: (indicative wordcount 520 words)
Prepare for Caroline:
a) a budget cash flow statement for the three months of January, February and March 20X4
b) a budget statement of profit or loss for the three months ending 31 March 20X4
c) a budget statement of financial position at 31 March 20X4 and:
d) briefly discuss whether or not you think Caroline’s business is going to be successful, identifying any areas where cash flow might be a problem.
Case Scenario 5 -Tawas
Tawas has just set up his new IT consulting company in London and has approached you to get advice taxes, banking and financing in particular he wants to know about the various types of taxes he might have to consider and the various banking and corporate services and products that are available to him.
Questions: (indicative wordcount 70 words)
Write him a short paragraph with your advice
