Part A Linda started the business of buying and selling toys in Oxford on the 1st of October 2020. She is preparing accounts to 31st October 2020. She contributed to the business with £8,000 in the Bank, £5200 cash, and 3,000 Van. The transactions during the month are as follows: 2/10 Bought a new Laptop £1000 from a local shop in Oxford and paid by cheque 4/10 Purchased toys (goods) £2450 on credit from Toys Ltd 5/10 Sold goods for £ 1500 and received the money in Bank 12/10 Paid in Cash £80 for repairing laptop 18/10 Goods returned to Toys Ltd £100 21/10 Received rent for part of the premises by cheque £500 23/10 Sold goods to Fred £1900; from this amount £1500 cash received immediately and the rest remains on credit. 23/10 Sold goods of £500 to David and received cash 24/10 Bought a second-hand car from Oxford motor vehicle auction for business use by issuing a cheque £2500 26/10 Paid the month’s wages to the part-time shopkeeper by cheque £820 30/10 Paid rent by cheque £1000 31/10 Linda has also paid £1600 from the business bank account for a week-long holiday in Florida. She has asked you whether she can class this as business expenses since it has enabled her to recover from the stresses and strain of running her own business. Required: a) Write double entry record the transactions in T-accounts b) Balance the accounts and bring down an opening balance c) Extract a Trial balance as at 31st October 2020
Part A
Linda started the business of buying and selling toys in Oxford on the 1st of October 2020. She
is preparing accounts to 31st October 2020. She contributed to the business with £8,000 in
the Bank, £5200 cash, and 3,000 Van. The transactions during the month are as follows:
2/10 Bought a new Laptop £1000 from a local shop in Oxford and paid by cheque
4/10 Purchased toys (goods) £2450 on credit from Toys Ltd
5/10 Sold goods for £ 1500 and received the money in Bank
12/10 Paid in Cash £80 for repairing laptop
18/10 Goods returned to Toys Ltd £100
21/10 Received rent for part of the premises by cheque £500
23/10 Sold goods to Fred £1900; from this amount £1500 cash received immediately and the
rest remains on credit.
23/10 Sold goods of £500 to David and received cash
24/10 Bought a second-hand car from Oxford motor vehicle auction for business use by
issuing a cheque £2500
26/10 Paid the month’s wages to the part-time shopkeeper by cheque £820
30/10 Paid rent by cheque £1000
31/10 Linda has also paid £1600 from the business bank account for a week-long holiday in
Florida. She has asked you whether she can class this as business expenses since it has
enabled her to recover from the stresses and strain of running her own business.
Required:
a) Write double entry record the transactions in T-accounts b) Balance the accounts and bring down an opening balance
c) Extract a
d) Prepare an Income Statement for the period ended 31st October 2020
The closing inventory is £ 250.00
e) Prepare a
f) Write a brief letter to Linda explaining what drawings are concerning small business and answering her query concerning her holiday.
PART B
i. According to the information available in Income and Financial position statements
in Part A, calculate the following ratios for Linda’s business
Competitors Average
• Net profit margin 31%
• Gross profit margin 54%
•
• Acid test ratio 1.35x
•
• Accounts payable payment period 72 days
ii. Assuming Linda’s competitor’s ratio averages are as stated above: Analyse her performance
with reference to each of the ratios calculated in comparison to those of her
competitor. (Maximum of 500 words).
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