finance exercises

7/29/2019 Finance Exercises

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1. Prepare Ronnies Balance Sheet using the following information.

Net profit taken from the Profit and Loss Account 74,000Loan 5,000Equipment 3,000Stock 40,000Fixtures and fittings 6,000Debtors 10,000Bank 10,000Premises 25,000

Cash 5,000Creditors 10,000Capital 10,000

2. Why does Ronnie have to draw up a balance sheet?

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$VVHWVDQG/LDELOLWLHVSort out the following items and place them under either of the two main headings,$VVHWVDQG/LDELOLWLHV

Building, Creditors, Cash at the bank, Stock, Debtors, Bank overdraft, Furniture, Equipment, Long TermLoans, Mortgage, Debentures (obbligazioni non garantite dallo Stato), Owners Capital, Net profit, Investments,Taxation, Reserves (retained profit), Advance payments (money already paid on orders which a

business have not delivered)

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1. What are asset s?

2. What are liabilit ies?

3. What is t he dif f erence between long t erm and shor t t erm?

4. Give an example of a f ixed asset ?

5. Give an example of a cur rent asset?

6. Give an example of a cur rent liabilit y?

7. Give an example of a long-t erm liabilit y?

8. Which t wo areas should balance on a balance sheet ?

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Advantages and Disadvantages of Different Sources of Finance

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Shar eholders f unds, cur r ent asset s, long-t er m liabilit ies,net asset s employed, f ixed asset s, cur r ent liabilit ies



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Identify in each of the following situation the best method (s) of finance from the following:

1. Government grants2. Selling assets3. Borrowing4. Selling shares5. Lease/hire purchases6. Retain profit7. Selling shares8. Mortgage9. Overdraft.

6LWXDWLRQRQHWe need to expand and increase our market shares by 40% in the next 2 years. We now that the currentinterest rate is 15% and banks are reluctant to lend businesses money

6LWXDWLRQWZRWe need to move to a new site, which will cost us 220,000. the current rate of interest in 4.5%.

6LWXDWLRQWKUHHWe need to buy new equipment, which will cost us 345,000, we have 500,000 retain profit from lastyear, but we also need to invest in a new project in the Far East

6LWXDWLRQIRXURichardson Ltd is a small building company. Simon Richardson the owner of the business has to pay hisstaff 13,000 for their wages. He does not have the money now, however, one of his existing customers

Selling shares

Borrowing

Credit

Retained profit

Government



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promised to pay him by the end of the week.

6LWXDWLRQILYHWoods Plc, are considering the launch of a new products. The cost of developing this product is estimatedby 760,000. The business shares are doing very well in the stock exchanges, as the value gone up bymore than 50% over the past 18 months.

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Profit and Loss Accounts

At the end of the financial year Ronnie will:

Produce a profit and loss accountProduce a Balance Sheet

Lets look at Ronnies Profit and Loss Accounts remembering that the profit and loss accounts only reflectthe money received from day to day trading. Ronnie has sold 700,000 worth of goods in a year.

Therefore,

Sales = 700,000

It costs Ronnie 350,000 to make or buy the goods in for the business to sell. Therefore, the cost price ofthe goods he has sold is 350,000 - the cost to the business of producing the goods that have beenactually sold during the financial period. This money is paid to suppliers. Often known as FRVWRIVDOHV.

If Ronnie sells the goods for 700,000 and it costs him 350,00 to make or buy the goods in then his:Gross Profit= Sales or Revenue minus cost of goods sold . Businesses use this figure to compare theirperformance from previous years or with other companies.

700,000 less cost of goods sold 350,000

Gross Profit = 350,000

The gross profit is 350,000, however, Ronnie still has his running expenses to take into consideration,which must be paid for.

Running expenses/overheads are regular ongoing expenses which a business has in order to buy and sellproducts ie rent, rates, wages, salaries, postage, stationery, fuel bills, telephone, advertising, marketing,insurance premiums, interest on loans, distribution cost, administration costs Ronnies running expenses(overheads) include:

Wages/salaries 154,000Rates/Rent 10,000Electricity 1,200Stationery 650

Telephone 1,200Advertising/marketing 600Mailing 600Insurance 600

Total running expenses (overheads) = 168,850Net profit - profit after running expenses (overheads) have been taken off.If the business is a Limitedcompany some of the net profit will be used to pay off shareholders in the form of dividends or may beused to plough back into the business as retained profits. Corporation Tax is calculated on the Net Profit ofthe business. If the business is a Sole Trader then the sole trader may take some of the net profit for hisown use during the course of the year. This is known as drawings. Ronnies Net Profit = Gross Profit -Running expenses

Ronnies Net Profit = 350,000 - 168,850

Ronnies Net Profit = 181,150

NB If expenses are greater than Gross Profit then a loss is made.

Sales revenue is the money received from selling the goods



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Celia Davidson is in the import/export business. The following balances were extracted from her books on 30 September 2008 .

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Sales 306 000Carriage on sales 28 300Purchases 147 600Carriage on purchases 12 800

Stock at 1 October 2007 13 400Wages and salaries 51 100Rent rates and insurance 6 900Advertising costs 11 800Motor vehicle expenses 2 700Office expenses 17 400Provision for doubtful debts 360Cash at bank 7 140Motor vehicles at cost 15 500Provision for depreciation of motorvehicles at 1 October 2007 3 100Trade Debtors 38 000Creditors 15 500Long-term loan 5 000Drawings 12 320Capital at 1 October 2007 35 000

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Stock at 30 September 2008 was valued at 14 100.q

During the year Celia Davidson took goods costing 1 700 for her own use. No entries have been made in the books.P Depreciation is to be charged on the motor vehicles at 20 % per annum using the straight line method.

R Wages and salaries, 1900, were owing at 30 September 2008 .r

Insurance, 400, was prepaid at 30 September 2008 .Q The provision for doubtful debts is to be maintained at 2 % of trade debtors.s

Celia Davidson made a long-term loan, 5000, at 4 % per annum to the business on 1 October 2007.The interest has not been entered in the books.

t u w x t u

G Prepare the Trading and Profit and Loss Accounts of Celia Davidson for the year ended 30 September 2008 . [19]

Prepare the Balance Sheet of Celia Davidson as at 30 September 2008 . [16]



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- Prepare the Delbois Trading and profit and loss accounts for year ended 30 September 2006- Prepare the Delbois Balance Sheet as at 30 September 2006



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Frank and Ernest have been in partnership for some years, sharing profits and losses in the ratio 2 : 1.The partnership Balance Sheet at 31st December 2006 QRWLQFOXGLQJWKHQHWSURILWDQGGUDZLQJV , wascomposed by the following items:

Fixed Assets at cost:Motor vehicles 78 200Equipment 70 400Fixtures and fittings 49 000Goodwill (avviamento) 12 000

Provision for depreciation:

Motor vehicles 20 000Equipment 5 000Fixtures and fittings 10 000Goodwill (avviamento) 2 000

Current Assets:

Stock 64 000Trade debtors 45 600Bank 19 200Petty Cash 2 000

Current liabilitiesTrade creditors 22 400Bank Overdraft 2 000Mortgage 30 000

Capital accounts:

Frank account 83 000Ernest account 166 000

Present the final Balance sheet statement as at 31st December 2006 and the Trading and Profit and lossaccounts for the year ending 31st December, considering the following DGGLWLRQDOLQIRUPDWLRQ:

Sales 802,000

minus Returns Inward -1,200

opening Stock 56,000

plus Purchases 453,000

minus Returns Outward -4,200

plus Carriage Inwards 9,000

minus Closing Stock -64,000

Wages 77,000

Light and heat 21,000



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Net profit 20 100Drawings 20 100

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Motor Vehicle 5,000

Equipment 2,500

Fixtures and Fittings 2,000

Goodwill 2,000

Printing and stationary 6,500

Telephone 11,500

Carriage outwards 12,500

Advertising 22,500Overheads 32,400

Discount allowed 1,200

Motoring expenses 4,860

Interest payable 3,000

Commission received 220

Discount received 840


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