Hi all. I'm normally used to preparing income statements at the year-end but is there anything different with those ending earlier? Please verify my solution...


QUESTION:
The following trial balance was extracted from the books of Nettle Ltd as at 30 September 2006:
EUR EUR
Buildings at cost 1,000,000
Plant and machinery at cost 560,000
Sales 3,200,000
Advertizing 98,000
Inventory at 1/10/2005 156,000
Heating and lighting 75,000
Wages and salaries 540,000
Accumulated depreciation of Buildings 240,000
Accumulated depreciation of Plant and Machinery 160,000
Directors salaries 150,000
Audit fees and expenses 34,000
Retained earnings at 1/10/05 376,500
Trade receivables 654,000
Insurance 63,000
12% Bank Loan 600,000
Bank interest 36,000
Purchases 1,650,000
Trade payables 350,000
General administrative expenses 202,000
Bad debts 44,500
Bank balance 164,000
Ordinary Share Capital (€1 shares) 500,000

5,426,500 5,426,500


The following additional information is available at the year end:

1. The value of closing inventory at 30 September 2006 was €204,000.

2. Depreciation is to be calculated on a straight line basis for buildings assuming a 50
year life and no residual value. Plant and machinery is to be depreciated on a reducing balance basis of 25%.

3. Further bad debts amounting to €12,500 are to be written off and a provision for
doubtful debts is to be created at 5% of the remaining trade receivables.

4. Included in insurance costs is a payment for buildings insurance of €36,000 that relates to the period 1 October 2006 to 30 September 2007.

5. Wages and salaries unpaid at 30 September 2006 amount to €55,000.

6. Any unpaid bank interest at 30 September 2006 must be accrued for.

7. The tax charge for the year has been calculated as €32,000 and remains unpaid at
30 September 2006.

Required:

(a) Prepare the Income Statement for Nettle Ltd. For the year ended 30 September
2006 and a Balance Sheet as at that date. (75 marks)

(b) Comment on the liquidity of Nettle Ltd. Using ratio analysis to support your comments. (15 marks)

(c) List five different users of financial statements and discuss their information needs. (10 marks)



SOLUTION:

Income Statement for the year ended 30 September 2006

Sales 3,200,000
Cost of Sales:
Opening inventory 156,000
Purchases 1,650,000
Closing inventory -204,000
-1,602,000
Gross Profit 1,598,000

Expenses
Advertizing 98,000
Heating and lighting 75,000
Wages and salaries [540 55] 595,000
Directors salaries 150,000
Audit fees and expenses 34,000
Insurance [63000-36000] 27,000
General Admin expenses 202,000
Bad debts [44.5 12.5] 57,000
Depreciation of buildings [1m/50yrs] 20,000
Depreciation of plant and machinery [400*.25] 100,000
Provision for doubtful debts [641500*5%] 32,075
-1,390,075
Operating profit 207,925
Bank interest -72,000
Profit before tax 135,925
Taxation -32,000
Profit for the year 103,925

Retained earnings b/f 376,500
Retained earnings c/f 480,425


Balance Sheet as at 30 September 2006
Cost Acc. Dep'n NBV
Non Current Assets
Buildings [760-20] 1,000,000 260,000 740,000
Plant and Machinery [400-100] 560,000 260,000 300,000
1,560,000 520,000 1,040,000
Current Assets
Inventory 204,000
Trade receivables [654-12.5]*.95 609,425
Bank 164,000
Prepayments 36,000
1,013,425
Total Assets 2,053,425

Capital and Reserves:
Ordinary Share Capital 500,000
Retained earnings 480,425
980,425
Non Current Liabilities
12% Bank Loan 600,000

Current Liabilities
Trade payables 350,000
Taxation payable 32,000
Accrued expenses [55 36] 91,000
473,000
Total equity and liabilities 2,053,425




Current Ratio: Current Assets / Current Liabilities = 1,013,425 / -473,000 = -2.14


Acid test ratio: Current Assets less inventory / Current Liabilities = 809,425 / -473,000 = -1.71


Trade receivable days: Trade receivables x 365 / Sales = 222,440,125 / 3,200,000 = 69.51 days


Trade payable days: Trade payables x 365 / Purchases = 127,750,000 / 1,650,000 = 77.42 days


Inventory days: Average inventory x 365 / Cost of sales = 65,700,000 /1,602,000 = 41.01 days