Prepare an income statement

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Reference no: EM131899

Question 1

Joanna Greenhas started a domestic cleaning business Clear View Cleaning (CVC). She started the business on 1st May 2013, it is now 30th June and she has asked for your help in preparing her financial statements. On 1st May Joanna deposited $5,000 into a new bank account opened in the name of the business. The $5,000 consisted of a $2,400 interest free loan from her father and $2,600 of her own money.

Joanna rented some equipment from Perry Equipment Hire. On 1st May, she signed a four-month rental agreement on cleaning equipment (A floor polishing machine and vacuum cleaners ) and paid $400 for the four month rental period. On the similar day Joanna also purchased (for $3,000) an old van to be used exclusively for the business. She thinks that the van has three years of useful life and then will have a resale value of $300.

Joanna has made a note in her diary whenever she has taken items from the business for her personal use. At 30th June she consults her diary and evaluates that she has taken $950 cash and $20 worth of cleaning supplies during the period.

The loan made by her father is to be repaid in twenty four equal repayments. Every repayment is made on the last business day of the calendar month. Normally all of the work done by CVC is performed on account but one domestic customer insisted in paying in cash at the time the work was done. The customer paid $120 and Joanna decided that it was not worth producing an invoice for an amount which had already been received. All work done in the period has been invoiced. Invoices totalling $8,300 had been issued.

At 30thJuneJoanna's customers owe her $900. Herdiary records list payments for supplies totalling $380, and at the end of the period she still has supplies that cost $60 on hand.She paid her employees $2,900, and still owes them $320 for their final week of work.During June Joanna paid her mobile telephone bill of $280 from her personal bank account. She estimates that 60% of the calls made were for the business purposes. She also has an unpaid bill for $125 from Keen Maintenance for a repair made to her floor polishing machine.


You must clearly show how you have calculated each amount shown on the statements.

Statements provided without calculations/explanations will receive no marks.

1. Prepare the business Income Statement for the period.

2. Prepare the Statement of Changes in Equity for the period.

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

Question 2

Jane is a student and also operates a part time business called Mayo Enterprises. She sells imported marker pens to various retail office and stationery supply shops. Business commenced in May 2012. Jane conducts all of the business' operations (she works alone and has no employees).

Jane purchases pens for 60c each and sells them for $2.50 each. These amounts have not changed since Jane started operations.

At 1st July 2012 an amount of $1,500 appears as inventory in the trial balance.

During the year ended 30thJune 2013, Jane made the following purchases and sales.

Date                Purchases                 Sales

(units) @60c              (units) @$2.50

July 11                                               1,000

Aug 3                                                    600

Sept 12          2,000

Sept 30                                              1,300

Dec 2              1,500

Dec 6                                                     400

Feb 3                                                     700

Mar 22            1,500

April 19                                              2,300

May 26                                                  800

TOTAL            5,000                          7,100

On 30thJune 2013(the end of the accounting period), Jane counted 370 pens remaining on hand.


1. Determine the Gross Profit for the year ended 30th June 2013 under both the periodic and perpetual methods of inventory recording. 

2. Of the two methods used in 1. Above, which method (if any):

(i) Gives the higher Gross Profit figure?

(ii) Gives the most information for control purposes, and how?

(iii) Considering the circumstances, which inventory method would be the most appropriate for Jane's business? Explain why.

Question 3

Why do accountants process adjusting journal entries?

You overhear a conversation between two Accounting for Business students. One student comments that "the effect of adjusting entries is either immaterial or non-existent over time" is this correct? If so why should accountants bother with the extra 'work' involved with the adjusting process?

Question 4

Susan Sweet set up a secretarial services business (Triple S Services) on 1 July 2013. Usually, Susan collects $20 per hour for services provided on the completion of each day's work and pays for the maintenance of her computer equipment with cash. Susan did an accounting subject at secondary school and so has kept her own accrual-based accounting records. At the end of the first year, Susan produced the following unadjusted trial balance:

Triple S Services

Unadjusted Trial Balance

As at 30th June 2013

Cash at Bank



Accounts Receivable



Computer Equipment



Motor Vehicle



Susan Sweet, Capital



Susan Sweet, Drawings






Telephone Expense



Supplies Expense



Repairs & Maintenance



Other Expenses









The subsequent adjustments were required at the year-end:

Supplies on hand at year-end, $230.

An account was received for repairs done to Susan's computer equipment before year-end but not recorded, $270.

All calculations must be shown. Solutions provided without calculations will receive no marks.


1. Prepare an income statement for the year ended 30thJune 2013 using accrual accounting.

2. Prepare an income statement for the year ended 30thJune 2013 using cash accounting.

3. Susan was not sure whether she could use cash accounting rather than accrual accounting for her business records. From the information provided, decide whether Susan should use accrual or cash accounting, and explain to her the reasons for your decision.

Question 5

The following values relate to various ratios determined for a sole trader, Ben Bournemouth, for the year ended 30 June 2013. At that date, the total assets in the Balance Sheet were $900 000. The ratios relate to the accounts either in respect of the 12-month period or at the date of the Balance Sheet for the end of the period.

Gross Profit to Total Sales



Current Ratio



Quick (acid test) Ratio



Credit Sales to Total Sales



Non-current Assets to Current Assets



Profit to Total Assets



Accounts Payable to Purchases



Profit Margin



Profit to Equity (start of period)



Credit Sales to Accounts Receivable




Consider that there are no prepaid expenses and that accounts payable are the only liability, and rounding answers to the nearest dollar, prepare:

1. A detailed Income Statement for the year ended 30 June 2013, adding an itemised cost of sales calculation (assuming a periodic inventory system).

2. The business' Balance Sheet as at 30 June 2013.

Reference no: EM131899

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