Michael Angelo owns Picta Simpla, a company specialising in selling painting by numbers packs by mail order. The packs are purchased from a wholesaler and then resold. The public have no access to the wholesaler and so there is no competition.

During the year ended 30 June 2023 Michael sold 2,900 units at \(£ 89\) each, having started the year with \(£ 19,250\) of inventory ( 600 units). During the year, he purchased a total of 3,150 packs from the wholesaler at \(£ 59\) each. Michael wants to value his inventory using the FIFO basis.

Staff have been paid wages totalling \(£ 14,500\), which is only slightly less than the advertising bills paid of \(£ 15,000\). Michael is upset since the advertising agency has yet to send a final bill, estimated to be \(£ 500\). Postage per unit sent out was \(£ 2\). The packing costs were \(£ 0.50\) per unit.

Rent was \(£ 1,000\) per month. Insurance of \(£ 3,500\) has been paid but \(£ 650\) of this relates to the year ending 30 June 2024. Electricity bills amounted to \(£ 2,900\), but the bill for the final quarter is still outstanding and is expected to be approximately \(£ 500\).

The business has a computer which was purchased about two years ago and which Michael reckons has about another three years of useful life left, at which point it will be worthless. It cost \(£ 4,000\) and Michael uses the straight-line method when calculating the depreciation charge. He also has a fax machine which he uses to communicate with his suppliers.

Stationery charges have amounted to \(£ 1,350\) and he has had telephone bills of \(£ 3,500\), of which \(£ 200\) relates to July and August 2023. In the year ending 30 June 2022, he paid \(£ 150\) for July and August 2022.

Michael has also paid \(£ 5,000\) from the business bank account for a month-long holiday in Florida. He has asked you whether he can class this as business expenses since it has enabled him to recover from the stresses and strain of running his own business.

Required:

(a) Prepare an income statement for the year ending 30 June 2023.

(b) Write a brief letter to Michael explaining what drawings are in relation to a small business and answering his query concerning his holiday.