Roger, a graduate of the University of South East England, has been running a business called ‘SuperSoftService’ since he completed his information technology (IT) degree six years ago.

He sells software and prides himself on providing fast delivery using his sports car, and he has an extensive stock of software, catering for the latest developments as well as meeting demand for software for old operating systems – he still can supply most things for Windows 95 and makes the occasional sale of old software.

About half of his sales are on a cash basis, and about half are on credit. He sells on credit only to friends, graduates and people he knows, and has no experience of bad debts.

The business is very profitable, and is almost entirely financed by borrowing from his father. But his father is concerned that Roger keeps borrowing more and more money to keep the business afloat.

His summarized financial statements are shown as follows:

a Comment on the financial position and performance of the business.
b How ‘real’ are the profits?

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Income statement of SupersoftService for the year ended 31 December year 6 Revenue Cost of goods sold 100,000 Opening inventories 60,000 Purchases 40,000 100,000 Less Closing inventories (80,000) 20,000 Gross profit 80,000 Administration and distribution expenses (50,000) Net profit 30,000 Drawings for personal expenditure (29,000) Retained profit for year 1,000 Statement of financial position of SuperSoftService as at 31 December year 6 Non-current assets Car at cost 1 January year 1 18,000 Less Provision for depreciation (9,000) 9,000 Current assets Inventories at cost Receivables Total assets Current liabilities Payables Overdraft 80,000 80,000 160,000 169,000 3,000 3.000 6,000 Loan from father 150,000 Equity Roger's capital 6,000 Roger's retained earnings 7,000 13,000 169.000