C8.1 [S]

The Biscuit Manufacturing Company commenced business on 1 January Year 1 with capital of £22,000 contributed by the owner. It immediately paid cash for a biscuit machine costing

£22,000. It was estimated to have a useful life of four years and at the end of that time was estimated to have a residual value of £2,000. During each year of operation of the machine, the company collected £40,000 in cash from sale of biscuits and paid £17,000 in cash for wages, ingredients and running costs.

Required

(a) Prepare spreadsheets for each of the four years analysing the transactions and events of the company.

(b) Prepare a statement of financial position (balance sheet) at the end of Year 3 and an income statement (profit and loss account) for that year.

(c) Explain to a non-accountant how to read and understand the statement of financial position

(balance sheet) and income statement (profit and loss account) you have prepared.