a.To answer the (a) sub-questions that follow you must think about the financial position and financial performance of a small local sole trader that has one owner/manager and no more than 3 full-time employees. If you can, answer the questions in the context of a real business you are aware of. If not, use the example of what you think is the likely financial situation of a small local sole trader.
i.Give an example of five assets (two non-current and three current) that such a business might own, and which would be recorded in its balance sheet at its accounting year end. Your answer should also explain why each of the five assets should be treated/classified as either a non-current asset or a current asset.
ii.Give an example of three liabilities (one non-current and two current) that such a business might owe, and which would be recorded in its balance sheet at its accounting year end. Your answer should also explain why such liabilities should be treated/classified as either a non-current liability or a current liability.
iii.In which section/part of the balance sheet might each item in (i) and (ii) be recorded? (4 marks)
iv.Construct a likely income statement for the sole trader for the accounting year that ends at the balance sheet date in (i) to (iii) above. Based on whatever knowledge and information you have or can realistically assume, give a reason for each of the sales, cost of sales (if applicable), expenses and net profit or loss figures of the business you have identified. (For example, if you gave the sales figure as £50,000 explain why that amount seems reasonable and based on some evidence or knowledge.)
v.It is extremely unlikely that the profit or loss generated in (iv) above is the same as the increase or decrease in cash over the same period. Give four reasons for such a difference.
vi.Assume that the sole trader business referred to above has previously only used the same unqualified accountant to submit a tax return to the government tax office. The business owner is now considering employing a qualified accountant to perform the same service. Give two disadvantages and three advantages for such an action.
b.
i. Using your knowledge of Figure 2.1 in Book 1, Chapter 2, as well as your general knowledge of double-entry accounting, give an example of how a specific transaction is captured in the accounting information system as an ‘input’, a ‘process’ and an ‘output’.
ii.Explain the importance of an ‘audit trail’ in financial accounting. Your answer should include an explanation of why a transaction that is separately and properly recorded as an ‘input’, a ‘process’ and an ‘output’, might help to provide a rigorous ‘audit trail’.
iii.An example of a financial accounting statement for a sole trader is a year-end balance sheet that is ready to be submitted to the government tax office. An example of a management accounting statement is a monthly balance sheet that is available on the last day of each month. Compare the two statements. In your comparison be sure to include at least one distinct advantage of each statement.
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Question 2 is based on B124 Book 2, Chapters 1 and 3 (3.1 to 3.5). (Completing Activity 1.2 in Chapter 1 of Book 2 would be excellent preparation for part (a). Completing Activity 3.2 in Chapter 3 of Book 2 would be very good preparation for part (b).)
a.Demonstrate how each of the following transactions will affect the accounting equation (Assets = Capital + Liabilities). Your answer should include a summary total for each of Assets, Capital and Liabilities at the end of the month. (Use a table for your answer similar to that given in Book 2 Chapter 1 Activity 1.2)
On 1 September Celia started a business selling ornaments and put £14,000 of her savings into a business bank account.
On 2 September Celia bought machinery for £4,000 paying by cheque.
On 2 September Celia bought, on credit, ornaments for resale costing £1,100.
On 3 September Celia bought a computer for £575 paying by cheque.
On 7 September Celia took £20 from the bank for a personal expense.
On 8 September Celia paid by cheque £800 for one month’s rent for her business premises.
On 15 September Celia paid by cheque £130 for one month’s insurance.
By 31 September Celia had sold ornaments for £2,400. Sixty percent of sales had been on cash and the rest on credit. The ornaments had originally cost Celia £950.
b.Calculate the profit made by Celia’s business in its first month of trading. (Ignore any depreciation expense.)
c.Calculate the profit made by Celia’s business in its first month of trading if the drawings on the personal expense on the 7th September had been a business expense instead. (Ignore any depreciation expense.)
d.Based on your answers to (a) – (c) above state the formula for the capital figure at the end of an accounting period i.e. the closing capital balance. Your formula should start with the opening capital balance.