Case Study 1

You are the Financial Controller of Stockiemuir Distributors Limited, a small business based in the Scottish Borders that distributes stationery products all over the UK. Your prime responsibilities are the accurate maintenance of the companys accounting records and the preparation of its regular financial statements.

At 31 October 2020, the companys year-end, the Balance Sheet is as follows:

Non-current Assets
Delivery vehicles		55,000
Computer equipment		6,000
Current Assets		61,000
Inventory	10,400
Debtors	26,500
Current Liabilities	36,900
Bank overdraft	20,700
Creditors	29,500
Net Current Liabilities	50,200	(13,300)
		47,700
Capital and Reserves Ordinary share capital (1 shares)		75,000
Retained profits (losses)		(27,300)
		47,700

At the Board Meeting in November 2020, considerable concern is expressed by the directors at the continuing loss-making operation and the cash flow problems evident in the rising bank overdraft, which at 31 October was over the 20,000 limit agreed with the bank.

After some discussion, the directors agree to make personal loans to the company totalling 15,000. These were to be paid into the companys bank account in November 2020. The directors agree that these loans are repayable as soon as the companys cash flow problems are resolved.

In addition, the directors agree to accept the offer of a 10,000 loan from the Bank of Drymen. The loan will be repayable over five years, with the first capital repayment not due to take place until 01 January 2022. Since the directors have been negotiating this

finance for some months, acceptance of the banks offer will allow the loan funds to be deposited into the companys bank account on 14 November 2020.

During November, the following transactions also occur:

1. Inventory, costing 3,000, is sold to customers for 5,500, on credit.
2. Cash of 10,500 is received from customers.
3. A second-hand delivery vehicle, costing 5,000, is purchased and paid for by direct bank transfer.
4. Cash of 12,580 is paid to suppliers.
5. Insurance premiums of 6,000 are paid (these premiums cover the period from 01 November 2020 to 28 February 2021.
6. Inventory is purchased from suppliers for 9,500, on credit terms.
7. Monthly salaries of 3,500 are paid.
8. Inventory, costing 6,625, is sold to customers for 12,250 for cash.

It is now early December 2020 and you are aware of the following other items that may require to be reflected in the November financial statements.

1. A customer, owing 1,200, has gone into liquidation in early December.
2. It is company policy to charge depreciation monthly. The annual depreciation rates are 20% on delivery vehicles and 25% on computer equipment on a reducing balance basis.
3. A delivery vehicle repair invoice of 800 for November was received in early December.
4. An adjustment may be required for any prepaid amount of the insurance premium.

Required:

1. Prepare the Accounting Equation as at 30 November 2020, detailing the impact of each of the transactions in November on the accounting records.
2. Prepare the Profit and Loss Account for the month of November 2020.
3. Prepare the Balance Sheet as at 30 November 2020.