Understanding financial statements

Lecture 3
 Question 1 – Balance Sheet

• The following items appeared in the March 31, 20XX of a

Mehta Ltd.:
Car £14,000 Capital, owner £53,800
Building £42,500 Creditors £16,900
Cash £ 2,300 Accounts Receivable £ 8,600
Cleaning Expense Payable £11,700 Bank Deposit £15,000

• Prepare the Balance Sheet for Mehta Ltd. as on March 31,

20XX
 Mehta Ltd.
Balance Sheet
Solution March 31, 20XX
Amounts
Assets
Cash £2,300
Bank Deposit £15,000
Accounts Receivable £8,600
Current Assets £25,900
Car £14,000
Building £42,500
Fixed Assets £56,500
Total Assets £82,400

Liabilities and Equity

Creditors £16,900
Cleaning Expense Payable £11,700
Current Liabilities £28,600
Capital, owner £53,800
Total Equity £53,800
Total Liabilities and Equity £82,400
 Question

Space Corporation is a consulting firm specializing in radar engineering. The

following account balances for Space existed on December 31, 2015:
Accounts Payable $ ?
Paid-in Capital 196,000
Cash 104,000
Equipment 12,000
Supplies 3,000
Accounts Receivable 18,000
Salaries Payable 4,000
Buildings and Land 106,000
Retained Earnings 41,000

Required: Prepare a balance sheet for Space Corp. as of December 31, 2015.
Solution Space Corporation
Balance Sheet
December 31, 2015
Assets

Cash $104,000
Accounts receivable 18,000
Supplies 3,000
Equipment 12,000
Buildings and land 106,000
Total assets $243,000
Liabilities and Stockholders' Equity
Accounts payable $ 2,000
Salaries payable 4,000

Total liabilities 6,000

Stockholders' equity
Paid-in capital $196,000
Retained earnings 41,000

Total stockholders' equity 237,000

Total liabilities &

stockholders' equity $243,000
 Uses and Usefulness of Balance Sheet

• It provides an insight into how the business is financed and

how its funds are deployed
• It can provide a basis for assessing the value of the business
• Relationships between assets and claims can be assessed
• Performance can be assessed
 Question 2
• The Balance Sheet of a business at the start of the week is as
follows: During the week the following transactions take
Company Ltd. place:
Balance Sheet a.Inventories sold for £11,000 cash; these
March 31, 20XX
Amounts inventories had cost £8000
Assets b.Sold inventories for £23,000 on credit, these
Inventory £28,000
Trade Receivable £33,000 inventories had cost £17,000
Current Assets £61,000 c.Received cash from trade receivables totaling
Property £145,000
Furniture and Fittings £63,000
£18,000
Fixed Assets £208,000 d.The owners of the business introduced
Total Assets £269,000 £100,000 of their own money, which was
Liabilities and Equity
placed in business bank account
Short Term Borrowing £43,000 e.The owners brought a motor van, valued at
Trade Payabale £23,000
Current Liabilities
£100,000 into the business
£66,000
Capital, owner £203,000 f. Bought inventories on credit for £14,000
Total Equity £203,000 g.Paid trade payables £13,000
Total Liabilities and Equity £269,000
Required:
Show the balance sheet after all of these
 Company Ltd.
Balance Sheet
Solution March 31, 20XX
Amounts
Assets
Cash £16,000
Bank Account £100,000
Inventory £17,000
Trade Receivable £38,000
Current Assets £171,000
Property £145,000
Motor Van £100,000
Furniture and Fittings £63,000
Fixed Assets £308,000
Total Assets £479,000

Liabilities and Equity

Short Term Borrowing £43,000
Trade Payabale £24,000
Current Liabilities £67,000
Capital, owner £412,000
Total Equity £412,000
Total Liabilities and Equity £479,000
Question 3 Linking P&L to B/S
• On April 1, 20XX, Mr. Mehta set up business investing £60,000.
The activities of the business resulted in the following revenues
and expenses for the year. Sales Revenue £103,000; Rent
Expenses £11,200; Electricity £42,000; Salaries Expenses
£16,600; and Delivery Expenses £2,500. The assets and
liabilities resulted into Cash £ 25,000; Accounts Receivable £
17,800, Supplies £ 2,300; Equipment £25,000; Building £66,700;
Expenses Payable £6,600 and Loan Payable £34,000. During the
year the owner withdrew £4,500 in cash for personal use and
made a further investment of £10,000 in the business.
• Prepare the Profit and Loss Account and Balance Sheet
 Mehta Ltd.
Balance Sheet

Solution March 31, 20XX

Assets
Amounts

Mehta Ltd. Cash £25,000

Inventory (Supplies) £2,300
Profit and Loss Account Accounts Receivable £17,800
For the year ended March 31, 20XX Current Assets £45,100
Equipment £25,000
Building £66,700
Revenue Fixed Assets £91,700
Sales Revenue £103,000 Total Assets £136,800

Liabilities and Equity

Expenses Expense Payable £6,600
Rent Expenses £11,200 Loan Payabale £34,000
Current Liabilities £40,600
Electricity £42,000
Capital, owner £60,000
Salaries Expenses £16,600 Withdrew -£4,500
Delivery Expenses £2,500 Additional Capital £10,000
Profit Transferred £30,700
£72,300 Total Equity £96,200
Net Profit £30,700 Total Liabilities and Equity £136,800
Sales Revenue, Cost of Sales & Profit
• The Sales Revenue for MTF Ltd. during the year
ending March, 31 20XX was £232,000
• The company began the accounting year with the
unsold stock of £40,000 and during the year bought
stock at a cost of £189,000. At the end of the year,
unsold stock of £75,000 were still held by the
business.
• What is the profit earned by the firm assuming
there are no operating expenses?
 Solution
MTF Ltd.
Profit and Loss Account
For the year ended March 31, 20XX

Revenue
Sales Revenue £232,000
Less: Cost of Goods Sold
Opening Stock £40,000
Purchases £189,000
(Closing Stock) -£75,000
£154,000
Net Profit £78,000
End of Lecture