Finance Exercises

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1. Prepare Ronnies Balance Sheet using the following information. Net profit taken from the Profit and Loss Account 74,000 Loan 5,000 Equipment 3,000 Stock 40,000 Fixtures and fittings 6,000 Debtors 10,000 Bank 10,000 Premises 25,000 Cash 5,000 Creditors 10,000 Capital 10,000 2. Why does Ronnie have to draw up a balance sheet?
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Sort out the following items and place them under either of the two main headings, $VVHWV DQG
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Building, Creditors, Cash at the bank, Stock, Debtors, Bank overdraft, Furniture, Equipment, Long Term Loans, 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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Finance Exercises

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Shar eholder s 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
1. What ar e asset s?

2. What ar e liabilit ies?

3. What is t he dif f er ence bet ween long t er m and shor t t er m?

4. Give an example of a f ixed asset ?

5. Give an example of a cur r ent asset ?

6. Give an example of a cur r ent liabilit y?

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

8. Which t wo ar eas should balance on a balance sheet ?

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Advantages and Disadvantages of Different Sources of Finance

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Owners fund

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Selling shares

Borrowing

Credit

Retained profit

Government

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Identify in each of the following situation the best method (s) of finance from the following: 1. 2. 3. 4. 5. 6. 7. 8. 9. Government grants Selling assets Borrowing Selling shares Lease/hire purchases Retain profit Selling shares Mortgage Overdraft.

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We need to expand and increase our market shares by 40% in the next 2 years. We now that the current interest rate is 15% and banks are reluctant to lend businesses money
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We need to move to a new site, which will cost us 220,000. the current rate of interest in 4.5%.
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We need to buy new equipment, which will cost us 345,000, we have 500,000 retain profit from last year, but we also need to invest in a new project in the Far East
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Richardson Ltd is a small building company. Simon Richardson the owner of the business has to pay his staff 13,000 for their wages. He does not have the money now, however, one of his existing customers

Finance Exercises
promised to pay him by the end of the week.
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Woods Plc, are considering the launch of a new products. The cost of developing this product is estimated by 760,000. The business shares are doing very well in the stock exchanges, as the value gone up by more 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 account Produce a Balance Sheet Lets look at Ronnies Profit and Loss Accounts remembering that the profit and loss accounts only reflect the money received from day to day trading. Ronnie has sold 700,000 worth of goods in a year. Sales revenue is the money received from selling the goods 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 of the goods he has sold is 350,000 - the cost to the business of producing the goods that have been actually sold during the financial period. This money is paid to suppliers. Often known as FRVW RI VDOHV. 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 their performance 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 sell products 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 Rates/Rent Electricity Stationery Telephone Advertising/marketing Mailing Insurance 154,000 10,000 1,200 650 1,200 600 600 600

Total running expenses (overheads) = 168,850 Net profit - profit after running expenses (overheads) have been taken off.If the business is a Limited company some of the net profit will be used to pay off shareholders in the form of dividends or may be used to plough back into the business as retained profits. Corporation Tax is calculated on the Net Profit of the business. If the business is a Sole Trader then the sole trader may take some of the net profit for his own 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.

Finance Exercises
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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 Carriage on sales 28 300 Purchases 147 600 Carriage on purchases 12 800 Stock at 1 October 2007 13 400 Wages and salaries 51 100 Rent rates and insurance 6 900 Advertising costs 11 800 Motor vehicle expenses 2 700 Office expenses 17 400 Provision for doubtful debts Cash at bank 7 140 Motor vehicles at cost 15 500 Provision for depreciation of motor vehicles at 1 October 2007 Trade Debtors 38 000 Creditors Long-term loan Drawings 12 320 Capital at 1 October 2007
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WYX`Xa a a a D EcbdGIH b$efEgihTG$D Eb p 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. Insurance, 400, was prepaid at 30 September 2008 .

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

P Depreciation is to be charged on the motor vehicles at 20 % per annum using the straight line method.

Qs The provision for doubtful debts is to be maintained at 2 % of trade debtors.

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.

tvuwyxv tvu FG0 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 QRW LQFOXGLQJ WKH QHW SURILW DQG GUDZLQJV , was composed by the following items: Fixed Assets at cost: Motor vehicles 78 200 Equipment 70 400 Fixtures and fittings 49 000 Goodwill (avviamento) 12 000 Provision for depreciation: Motor vehicles 20 000 Equipment 5 000 Fixtures and fittings 10 000 Goodwill (avviamento) 2 000 Current Assets: Stock 64 000 Trade debtors 45 600 Bank 19 200 Petty Cash 2 000 Current liabilities Trade creditors 22 400 Bank Overdraft 2 000 Mortgage 30 000 Capital accounts: Frank account 83 000 Ernest account 166 000 Present the final Balance sheet statement as at 31st December 2006 and the Trading and Profit and loss accounts for the year ending 31st December, considering the following DGGLWLRQDO LQIRUPDWLRQ:
Sales minus Returns Inward opening Stock plus Purchases minus Returns Outward plus Carriage Inwards minus Closing Stock Wages Light and heat 802,000 -1,200 56,000 453,000 -4,200 9,000 -64,000 77,000 21,000

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5,000 2,500 2,000 2,000 6,500 11,500 12,500 22,500 32,400 1,200 4,860 3,000 220 840

Motor Vehicle Equipment Fixtures and Fittings Goodwill Printing and stationary Telephone Carriage outwards Advertising Overheads Discount allowed Motoring expenses Interest payable Commission received Discount received

Net profit 20 100 Drawings 20 100