Bertie and Reginald are managers of a luxury silk ties shop. The business is incorporated under...

 

  
 

Transcribed Image Text:

Bertie and Reginald are managers of a luxury silk ties shop. The business is incorporated under the name of Eulalie plc. As the business is relatively small, they do not employ a full-time accountant but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare a first draft of the accounts for Eulalie plc for the year ending 31st December 2020. A list of closing balances reported in Eulalie plc's statement of financial position as at 31st December 2019 is set out below: Eulalie plc Statement of Financial Position Shop premises (cost) Shop premises (accumulated depreciation) Fixtures and fittings (cost) Fixtures and fittings (accumulated depreciation) Inventories of ties at cost Trade receivables Prepayment Total assets Trade payables Accruals Bank overdraft Bank loan repayable in 2023 Total liabilities Share capital (£2 ordinary shares) Retained profits Total equity ii. I iii. 31st December 2019 iv. £ 225,000 13,500 50,000 15,000 169,500 156,000 2,000 27,850 5,000 25,000 135,000 250,000 131,150 3 574,000 Further information: i. The shop premises were acquired under a 50-year lease on 1st January 2017 and are being depreciated to a zero residual value. The fixtures and fittings were also bought on 1st January 2017 and are being depreciated over 10 years to a zero residual value. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings. The business pays its insurance premium annually on 1st July to cover the following twelve month period. This is the only prepayment as at 31st December 2019. 192,850 381,150 v. The accrued expenses relate to the accountant's fees for preparing last year's accountants, paid in March 2020. This is the only accrual as at 31st December 2019. vi. All profits earned are subject to a 20% corporate income tax paid on 31st December of the year in which they are earned. During the year to 31st December 2020, the following transactions and events took place: 1. The business made cash sales of £644,250. It also made credit sales to internet retailers of £460,725. 2. Inventory costing £568,350 was bought during the year. All items were bought on credit. Suppliers were paid £578,625 over the course of the year. 3. The inventory of ties as at 31st December 2020 cost £206,250. 4. The part-time shop assistant was paid wages of £81,750 over the year. 5. You have been told that the fees charged for preparing the accounts will be 30% higher than last year. The bill will be sent out in March 2021. 6. Receipts from credit customers totalled £408,975. 7. Electricity bills totalling £13,725 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2020 the bill for the quarter ended on 28th February 2021 had not yet been received, but was estimated to be £5,175. 8. The insurance premium of £6,750 for the year to 30th June 2021 was paid during July 2020. 9. The firm pays 3% interest on the long-term bank loan and 1.5% interest on the overdraft. Interest charges are based on the amounts outstanding on 31st December 2019 and are all paid by the end of the reporting period. 10. In December 2020 £60,000 was paid off the bank loan. 11. Administrative expenses of £9,487.50 were paid as they arose. 12. Bertie and Reginald received directors' wages of £7,500 per month each. C. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency. a. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2019 using the figures reported in previous year's statement of financial position, and for 2020 using the statement of financial position you prepared. Show your workings. (4 marks) b. Comment on whether the position of the business improved over the last year. (2 marks) (4 marks) c. Briefly outline the key limitations of ratio analysis. Bertie and Reginald are managers of a luxury silk ties shop. The business is incorporated under the name of Eulalie plc. As the business is relatively small, they do not employ a full-time accountant but pay a local firm to prepare their accounts after the end of the accounting period from information they supply. You are on a summer work placement with this firm and have been asked to prepare a first draft of the accounts for Eulalie plc for the year ending 31st December 2020. A list of closing balances reported in Eulalie plc's statement of financial position as at 31st December 2019 is set out below: Eulalie plc Statement of Financial Position Shop premises (cost) Shop premises (accumulated depreciation) Fixtures and fittings (cost) Fixtures and fittings (accumulated depreciation) Inventories of ties at cost Trade receivables Prepayment Total assets Trade payables Accruals Bank overdraft Bank loan repayable in 2023 Total liabilities Share capital (£2 ordinary shares) Retained profits Total equity ii. I iii. 31st December 2019 iv. £ 225,000 13,500 50,000 15,000 169,500 156,000 2,000 27,850 5,000 25,000 135,000 250,000 131,150 3 574,000 Further information: i. The shop premises were acquired under a 50-year lease on 1st January 2017 and are being depreciated to a zero residual value. The fixtures and fittings were also bought on 1st January 2017 and are being depreciated over 10 years to a zero residual value. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings. The business pays its insurance premium annually on 1st July to cover the following twelve month period. This is the only prepayment as at 31st December 2019. 192,850 381,150 v. The accrued expenses relate to the accountant's fees for preparing last year's accountants, paid in March 2020. This is the only accrual as at 31st December 2019. vi. All profits earned are subject to a 20% corporate income tax paid on 31st December of the year in which they are earned. During the year to 31st December 2020, the following transactions and events took place: 1. The business made cash sales of £644,250. It also made credit sales to internet retailers of £460,725. 2. Inventory costing £568,350 was bought during the year. All items were bought on credit. Suppliers were paid £578,625 over the course of the year. 3. The inventory of ties as at 31st December 2020 cost £206,250. 4. The part-time shop assistant was paid wages of £81,750 over the year. 5. You have been told that the fees charged for preparing the accounts will be 30% higher than last year. The bill will be sent out in March 2021. 6. Receipts from credit customers totalled £408,975. 7. Electricity bills totalling £13,725 were paid during the year. The company has recently changed its electricity supplier and is now being billed quarterly in arrears. At the end of December 2020 the bill for the quarter ended on 28th February 2021 had not yet been received, but was estimated to be £5,175. 8. The insurance premium of £6,750 for the year to 30th June 2021 was paid during July 2020. 9. The firm pays 3% interest on the long-term bank loan and 1.5% interest on the overdraft. Interest charges are based on the amounts outstanding on 31st December 2019 and are all paid by the end of the reporting period. 10. In December 2020 £60,000 was paid off the bank loan. 11. Administrative expenses of £9,487.50 were paid as they arose. 12. Bertie and Reginald received directors' wages of £7,500 per month each. C. The owners of the business also want to find out more about the financial health of their firm and are particularly interested in its liquidity and long-term solvency. a. They would like you to calculate the current ratio, quick (acid test) ratio, gearing ratio and working capital figures for 2019 using the figures reported in previous year's statement of financial position, and for 2020 using the statement of financial position you prepared. Show your workings. (4 marks) b. Comment on whether the position of the business improved over the last year. (2 marks) (4 marks) c. Briefly outline the key limitations of ratio analysis.

Answer rating: 100% (QA)

a Calculation of Ratios For 2019 Current Ratio Current Assets Current Liabilities Inventories Trade Receivables Prepayment Trade Payables Accruals Ban... View the full answer