One of your close friends, Sebastian See, has just started a delivery business. He is having difficulty understanding the purposes of financial statements and how they fit together across time.
(a) Write a one-page memo (in not more than 450 words) to Sebastian, explaining the purposes of financial statements and describing how they are linked across time.
(b) As the economy recovers, Sebastian anticipates an increase in the customer demand. He decides to approach his banker to discuss a loan for the expansion.
Advise Sebastian what key information the banker will be looking for and explain whether this information is available from the financial statements.
On 1 July 2022, Andrew Mak started an engineering firm, Excellent Engineering.
The following are the transactions that occurred during the first month of operations.
01 Jul. Andrew invested $40,000 cash, and a $64,000 van in the firm.
01 Jul. After much persuasion, Andrew’s aunt transferred $20,000 to Andrew’s personal bank account as a loan to him.
01 Jul. Andrew invested the $20,000 which he received from his aunt in the firm as his own investment in the firm.
01 Jul. The firm hired Mary as a part-time office assistant for $200 per day, as needed and a technician for $4,000 per month.
01 Jul. The firm paid $8,000 cash for July and August rental and another $4,000 for the rental deposit. The rental deposit is refundable.
01 Jul. The firm paid $960 for 12 months of insurance coverage commencing from 1 July 2022.
05 Jul. The firm purchased $7,200 of supplies on credit from Benito Ltd.
15 Jul. The firm billed Merlion Mall $12,000 for repairs done on its chilling system.
18 Jul. The firm received $4,000 cash from Merlion Mall as partial payment toward its account.
23 Jul. The firm received $10,000 cash from Harbour Mall as advance payment for services to be performed in September.
28 Jul. The firm received a telephone bill of $280. Arrangement has been made to pay the bill on 3 August via giro transfer.
31 Jul. The firm paid $4,000 for the technician’s salary of the month while the wages of Mary who has worked for 10 days will be paid on 1 August.
31 Jul. Depreciation of the van and office equipment for the month are $120 and $0 respectively.
(a) Analyse the above and record the necessary entries. Narration is not required.
(b) Present the trial balance of Excellent Engineering as of 31 July 2022.
(c) From the trial balance, compute the following and show the workings:
(i) Total assets.
(ii) Total liabilities.
(iii) Net profit.
(iv) Total equity
Answer to Above Questions on Financial Management
Answer 1 a)
Financial statements are the important statements prepared within an organisation with the objective of providing information to the relevant stakeholders about the organisation’s financial position and its performance over a period of time. The financial statement mainly includes income statement and balance sheet showing the profitability performance and financial position of a business at a particular date. It also includes the cash flow statement showing the cash flow performance of a company throughout the period. The main purpose of a financial statement is therefore to provide a snapshot of the organisation’s financial health and give an indication of its profitability performance as well. They also reflect about the company’s revenue, expenses, profitability and debt…..
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