Mike Ash decided to invest an inheritance of £5,000 in a business

QUESTION

Appendix 1
Level I
EA1.9 Time allowed “ 45 minutes
Mike Ash
decided to invest an inheritance of £5,000 in a business to provide
word-processing and desktop publishing services. He purchased some computer
equipment, a phone and fax system, a small photocopier, paper and computer
stationery, and started business on 1 September 2000.

(i) During September there were no
sales of publishing services but the business made the following
transactions, which you are required to present in a T-account format.
£
£5,000 from Mike Ash 5,000
Purchase of computer and printer
for cash 1,700
Purchase of photocopier for cash 2,750
Purchase of stationery for cash 300
Purchase of computer
printer/photocopy paper for cash 200

Mike soon realised that a CD
rewriter was essential to back up the large amount of data he expected to be
storing on his PC. He had spotted the best one for the job, which cost £200.

(ii) Can the business currently afford to buy the
CD rewriter?
(iii) What
other options are open to Mike?

Level II
EA1.10 Time allowed “ 45 minutes
Arthur
Moment set up a table making business, Forlegco, on 1 July 2000. He had £10,000
available to invest, which is the amount he estimated was required for setting
up costs. In the first month of trading Forlegco entered into the following
transactions:
£
£10,000 from Arthur Moment 10,000
Purchase of hand tools for cash 2,000
Purchase of lathe, power saw and
drill on one months credit 6,000
Purchase of printing and stationery
– invoice received for half the order 100
The total order is £200, and it was
all delivered in July and used
Purchase of advertising flyers for
cash
2,000 at 50p each, of which 1,000
will
be used in July, and 500 in August and September
Purchases of timber, glue and
varnish, from Woodco, payable within the month
£1,500 –
half of this stock will be on hand at 31 July 2000
Sales of tables to Gardenfurnco for
settlement one month later
(10 tables
at £700 each)

(Note that
you can use the simple profit and loss account and cash flow statement relating
to the above transactions that you may have already calculated in Exercises
EA1.4 and EA1.6).
(i) Does the profit or loss for
the month calculated in Exercise EA1.4 equal the cash
movement in the month calculated
in Exercise EA1.6? If it does not why doesnt it?
(ii) Prepare a reconciliation of profit to cash flow for the month of
July 2000 for Forlegco to
support your answer to (i) above.

ANSWER

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