$6.$ Income Statements & Balance Sheets Introduction

Exercise

How accountants calculate profits: Basic financial accounting exercise

A distant cousin of yours had inherited some money so he was able to realise his life long

ambition to set up in business and sell that well known financial publication, the National

Review. He put R$5000$ into the business, arranged to get any additional funds required from

his friendly local bank manager and started trading on $1$ January $2010.$

The first thing he did was to buy himself a high performance Izuzu Frontier for R$4,000.$

During his first year's trading he bought and paid for $100$ National Reviews $(50$ @ R$40$ and $50$

@ R$50$ each$).$ He sold $80$ of them for R$80$ each, partly on cash and partly on credit.

He also pays cash for other expenses $($R$580)$ incurred during the year.

At the end of his first year's trading he wishes to ascertain his financial position and, having

heard that you are involved in business, asks you to work out his business's profit $($or loss$)$

position and its financial position.

He also gives you the following information:

At the end of the year he is still owed for four publication sold on credit. Three of these had

been bought by Standard Bank and the fourth by Rod Miller who was last seen boarding a

plane bound for China.

He hopes that the Isuzu will last for at least four years and should be worth at least R$1,000$ as

a trade$-$in in at that time. Advertisements in the newspaper showed that the market value of

the Izuzu at the $31$ December $2010$ was R$3,500-$ R$3,750.$

In addition:

a$)$ You must work out the business$$s cash balance.

b$)$ Ignore tax, dividends, interest, inflation and anything else you don't understand.

c$)$ You may find the attached worksheets useful.

d$)$ If the numbers are not big enough for you, just keep adding noughts to make them