Jimmy provides the following list of information for incorporation into the income statement and statement of financial position. Jimmy is keen to learn how to prepare the statements, so he made an attempt himself, which he has presented to you.

1. Jimmy introduced 50,000 of capital, which was paid into a bank account opened in the name of the business.
2. Premises were rented from 1 January 2020 at an annual rental of 20,000. Rent is paid quarterly in advance and so during the year, rent of 25,000 was paid to the owner of the premises.
3. Rates (a tax on business premises) were paid during the year as follows;

1. For the period 1 January 2020 to 31 March 2020 500
2. For the period 1 April 2020 to 31 March 2021 1,200

1. A delivery van was bought on 1 January 2020 for 12,000. This is expected to be used in the business for four years and then to be sold for 2,000.
2. Wages totalling 33,500 were paid during the year. At the end of the year, the business owed 630 of wages for the last week of the year.
3. Electricity bills for the first three quarters of the year were paid totalling 1,650. After 31 December 2020, but before the financial statements had been finalised for the year, the bill for the last quarter arrived showing a charge of 620.
4. Purchased inventory totalling 143,000, bought on credit.
5. Purchased inventory totalling 12,000, bought for cash.
6. Saleson credit totalled 152,000 (cost of sales 74,000).
7. Cash sales revenue totalled 35,000 (cost of sales 16,000).
8. Receipts from trade receivables totalled 132,000.
9. Payments to trade payables totalled 121,000.
10. Van running expenses paid totalled 9,400.

At the end of the year it was clear that a trade debtor who owed 400 would not be able to pay any part of the debt.The business uses the straight-line method for depreciating non-current assets.

Jimmy Bowden

Income Statement for the year ended 31 December 2020

Sales revenue		152,000
Less Cost of Sales (74,000 + 16,000)		90,000
Gross Profit		92,000
Less Rent Rates Wages Electricity Van expenses	20,000 1,200 33,500 1,650 2,500	58,850
Net profit for the year		33,150

Jimmy Bowden

Statement of Financial Position as at 31 December 2020

Assets		Claims
Delivery van (12,000 - 2,500)	12,000	Capital	50,000
Inventories	143,000	Income account	164,000
Trade receivables	152,000	Trade payables	143,000
Cash at bank	50,000
	357,000		357,000

Since Jimmy could not balance the Statement of Financial Position, he inserted an Income account and put the balancing figure.

Required:

1. Prepare the correct Income Statement and Statement of Financial Position

(30 Marks)

1. Using your statement, identify the mistakes Jimmy had made in preparing the accounts

(20 marks)

1. Prepare a brief report on the profitability of the business compared to the budget given below with some recommendations as to possible course of action in the future. To help you, Jimmy provided the following information about his budget for year ended 31 December 2020

(50 marks)

Budget for 2020
Sales	200,000
Gross profit	100,000
Total expenses	70,000
Net profit	30,000

Hint:

You may use the following ratios for comparison

Gross profit margin = Gross profit / Sales x 100

Net profit margin = Net profit / Sales x 100

You may also use % changes for comparison