Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders. As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare a first draft of the accounts for Ketchum Ltd for the year ending 31st December 2019. A list of closing balances reported in Ketchum Lid's statement of financial position as at 31st December 2018 is set out below: Ketchum Ltd. Statement of Financial Position 31st December 2018 Shop premises (cost) 56,250 Shop premises (accumulated depreciation) 3,375 Fixtures and fittings (cost) 12,500 Fixtures and fittings (accumulated depreciation) 3,750 Inventories of books at cost 42,375 Trade receivables 39,000 Prepayment 500 Total assets 143,500 Trade payables 6,962.50 Accruals 1,250 Bank overdraft 6,250 Bank loan repayable in 2022 33,750 Total liabilities 48,212.50 Share capital (1 ordinary shares) 62,500 Retained profits 32,787.50 Total equity 95,287.50 Further information: i. The shop premises were acquired under a 50-year lease on 1st January 2016 and are being depreciated to a zero residual value. ii. The fixtures and fittings were also bought on 1st January 2016 and are being depreciated over 10 years to a zero residual value. iii. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings. iv. The business pays its insurance premium annually on 1st July to cover the following twelve month period. This is the only prepayment as at 31st December 2018. V. The accrued expenses relate to the accountant's fees for preparing last year's accountants, paid in March 2019. This is the only accrual as at 31st December 2018. All profits earned are subject to a 20% corporate income tax paid on 31st December of the year in which they are earned. vi. During the year to 31st December 2019, the following transactions and events took place: 1. The business made cash sales of 107,375. It also made credit sales to internet retailers of 76,787.50. 2. Inventory costing 94,725 was bought during the year. All items were bought on credit. Suppliers were paid 96,437.50 over the course of the year. 3. The inventory of books as at 31st December 2019 cost 34,375. 4. During the year some fixtures that had cost 2,500 when purchased were sold for 1,375. New fixtures were acquired for cash at a cost of 3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year's depreciation is charged in the year of acquisition. 5. The part-time shop assistant was paid wages of 13,625 over the year. 6. Receipts from credit customers totalled 68, 162.50. 7. Electricity bills totalling 2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31st January 2020 had not yet been received, but was estimated to be 862.50. 8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020. 9. The insurance premium of 1,125 for the year to 30th June 2020 was paid during July 2019. 10. In December 2019 10,000 was paid off the bank loan, and interest of 1,000 was paid on 31st December 2019. Overdraft interest of 118.75 was charged and paid. 11. Administrative expenses of 1,581.25 were paid as they arose. 12. Ernest and Mary received directors' wages of 1,250 per month each. Required: A. Using the information provided by Ernest and Mary, and Ketchum Ltd's statement of financial position as at 31st December 2018, prepare the following: a. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd. (15 marks) b. A statement of profit or loss for 2019. (4 marks) c. A statement of cash flows for 2019. (3 marks) d. A statement of financial position as at 31st December 2019. (3 marks) Show your workings. B. Ernest and Mary meet you to discuss the draft accounts. They say they had hoped to be able to pay a dividend of around 15 pence per share, but they fear that they might not have enough cash to do this. They query whether this is the case, since they are making reasonable profits. a. Calculate the amount of the proposed dividend payment. (1 mark) b. Advise Ernest and Mary if their company can pay out such dividend based on the figures reported in the financial statements you prepared. (1 mark) c. Provide a brief explanation of the difference between cash flow and profit. (3 marks) C. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency. a. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2018 using the figures reported in previous year's statement of financial position, and for 2019 using the statement of financial position you prepared. Show your workings. (4 marks) b. Comment on whether the position of the business improved over the last year. (2 marks) c. Briefly outline the key limitations of ratio analysis. (4 marks) Ernest and his partner Mary run a second-hand bookshop. The business is incorporated under the name of Ketchum Ltd, and they are the only shareholders. As the business is small they do not employ a full-time accountant, but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare a first draft of the accounts for Ketchum Ltd for the year ending 31st December 2019. A list of closing balances reported in Ketchum Lid's statement of financial position as at 31st December 2018 is set out below: Ketchum Ltd. Statement of Financial Position 31st December 2018 Shop premises (cost) 56,250 Shop premises (accumulated depreciation) 3,375 Fixtures and fittings (cost) 12,500 Fixtures and fittings (accumulated depreciation) 3,750 Inventories of books at cost 42,375 Trade receivables 39,000 Prepayment 500 Total assets 143,500 Trade payables 6,962.50 Accruals 1,250 Bank overdraft 6,250 Bank loan repayable in 2022 33,750 Total liabilities 48,212.50 Share capital (1 ordinary shares) 62,500 Retained profits 32,787.50 Total equity 95,287.50 Further information: i. The shop premises were acquired under a 50-year lease on 1st January 2016 and are being depreciated to a zero residual value. ii. The fixtures and fittings were also bought on 1st January 2016 and are being depreciated over 10 years to a zero residual value. iii. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings. iv. The business pays its insurance premium annually on 1st July to cover the following twelve month period. This is the only prepayment as at 31st December 2018. V. The accrued expenses relate to the accountant's fees for preparing last year's accountants, paid in March 2019. This is the only accrual as at 31st December 2018. All profits earned are subject to a 20% corporate income tax paid on 31st December of the year in which they are earned. vi. During the year to 31st December 2019, the following transactions and events took place: 1. The business made cash sales of 107,375. It also made credit sales to internet retailers of 76,787.50. 2. Inventory costing 94,725 was bought during the year. All items were bought on credit. Suppliers were paid 96,437.50 over the course of the year. 3. The inventory of books as at 31st December 2019 cost 34,375. 4. During the year some fixtures that had cost 2,500 when purchased were sold for 1,375. New fixtures were acquired for cash at a cost of 3,750 and are also being depreciated over 10 years to a zero residual value. No depreciation is charged in the year of disposal but a full year's depreciation is charged in the year of acquisition. 5. The part-time shop assistant was paid wages of 13,625 over the year. 6. Receipts from credit customers totalled 68, 162.50. 7. Electricity bills totalling 2,287.50 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2019 the bill for the quarter ended on 31st January 2020 had not yet been received, but was estimated to be 862.50. 8. You have been told that the fees charged for preparing the accounts will be the same as last year. The bill will be sent out in March 2020. 9. The insurance premium of 1,125 for the year to 30th June 2020 was paid during July 2019. 10. In December 2019 10,000 was paid off the bank loan, and interest of 1,000 was paid on 31st December 2019. Overdraft interest of 118.75 was charged and paid. 11. Administrative expenses of 1,581.25 were paid as they arose. 12. Ernest and Mary received directors' wages of 1,250 per month each. Required: A. Using the information provided by Ernest and Mary, and Ketchum Ltd's statement of financial position as at 31st December 2018, prepare the following: a. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Ketchum Ltd. (15 marks) b. A statement of profit or loss for 2019. (4 marks) c. A statement of cash flows for 2019. (3 marks) d. A statement of financial position as at 31st December 2019. (3 marks) Show your workings. B. Ernest and Mary meet you to discuss the draft accounts. They say they had hoped to be able to pay a dividend of around 15 pence per share, but they fear that they might not have enough cash to do this. They query whether this is the case, since they are making reasonable profits. a. Calculate the amount of the proposed dividend payment. (1 mark) b. Advise Ernest and Mary if their company can pay out such dividend based on the figures reported in the financial statements you prepared. (1 mark) c. Provide a brief explanation of the difference between cash flow and profit. (3 marks) C. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency. a. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2018 using the figures reported in previous year's statement of financial position, and for 2019 using the statement of financial position you prepared. Show your workings. (4 marks) b. Comment on whether the position of the business improved over the last year. (2 marks) c. Briefly outline the key limitations of ratio analysis. (4 marks)