Accrual Basis Accounting

Jacques and Gilles open a mobile phone store, Mobilit, in southern Euroland in x5. Most of

their sales are cash sales but they offer credit to corporate customers. They buy the building in

which the store is situated. It contains additional office space which they rent out to a small

avant garde advertising agency called 'Beyond the Pale'.

Given the size of their business, Jacques and Gilles keep their books on a cash basis but

prepare accrual-based accounts once a year to discover the profit the business has generated in

the year. (The bank and tax authorities ask for such accounts, too.) The business is growing and

by x9 they are too busy to calculate it themselves. Learning of your accounting skills, they ask

accounts for that calendar year.

They give you the following information:

Mobilit's balance sheet at the start of x9; and

Summarised cash flow data for x9, taken from the business's cash records; both of which are

set out in exhibit 1.

In addition, they allow you access to the business's books, where you discover the following (all

currency amounts are in 000):

(a) Mobilit's credit sales in x9 are one-fifth of its cash sales that year.

(b) With regard to the extra office space, the advertising agency pays one year's rent in advance

on 1 September each year. Mobilit increased the rent by 10% in x9 - from 30 to 33.

(c) During x9, Mobilit purchases, for resale, mobile phones at a cost of 440. All purchases are

on account. Mobilit's inventory declines by 10 (in cost terms) between the start and end of the

year.

(d) Annual depreciation charges on the building and equipment acquired before x9 are 20 and

12 respectively. As for the equipment purchased in x9, Mobilit records a full year's

(straight-line) depreciation that year. The equipment is expected to last five years and has no

residual value.

(e) Interest on the 8% bank loan is paid annually on 31 March. Mobilit repays one-fifth of the

loan on 31 March x9. (Assume a 360 day year when calculating interest expense.)

(f) The end-x9 accrual of utility costs is 2. All staff salaries earned in x9 are paid by year-end.

Master in Finance (Uc3m)

2

Required

Prepare Mobilit's income statement for x9 and its balance sheet at end-x9. Show detailed

calculations and ignore taxes.

Exhibit 1 Mobilit: Information to prepare x9 accounts. (amounts in 000)

A: Balance Sheet, at 1 January x9

Fixed assets Owners' equity

Building, at cost 500 Jacques and Gilles, capital* 237

less: Accumulated depreciation -100

400 Long-term liabilities

Equipment, at cost 110 8% bank loan 200

less: Accumulated depreciation -50

60 Current liabilities

460 8% bank loan, current portion 50

Current assets Accounts payable, phone suppliers 47

Merchandise inventory 80 Rent received in advance 20

Accounts receivable 12 Accrued interest payable 15

Cash 20 Other accruals (utility costs) 3

112 135

Total assets 572 Total equities 572

* includes contributed capital and retained

earnings.

B: Summary of cash flows during x9

Inflows Outflows

Payments for:

Collections from customers: Merchandise (mobile phones) 432

Credit sales 96 Salaries 48

Cash sales 500 Utilities 16

596 Interest on loan 20

Equipment 30

Annual rent received, 1 September 33 Loan repayment 50

629 596