Phoebe is a sole trader who runs a small catering company, Hilary’s Bistro. She has asked you to help her with the preparation of her financial statements this year as she is unhappy with the service provided by her local accountant and knows that you have been studying financial accounting at university.

A list of closing balances reported in Hilary’s Bistro statement of financial position as at 31st December 2019 is set out below:

Hilary’s Bistro

Statement of Financial Position

31st December 2019

£ £

Premises (cost) 200,000

Premises (accumulated depreciation) 16,000

Fixtures and fittings (cost) 47,000

Fixtures and fittings (accumulated depreciation) 18,800

Delivery van (cost) 15,000

Delivery van (accumulated depreciation) 5,400

Inventory at cost 64,000

Trade receivables 24,000

Prepayment 6,750

Total assets 316,550

Trade payables 53,875

Accruals 500

Bank overdraft 8,675

Bank loan repayable in 2030 225,000

Total liabilities 288,050

Owner’s capital 28,500

Total equity 28,500

Further information:

i. The shop premises were acquired under a 50-year lease on 1st January 2016 and are being depreciated to a zero residual value.

ii. The fixtures and fittings were also bought on 1st January 2016 and are being depreciated over 10 years to a zero residual value.

iii. Depreciation is provided on a straight line basis for both the shop premises and the fixtures and fittings.

iv. The van was acquired on 31st December 2017 and is being depreciated using the reducing balance method at an annual rate of 20%.

v. The business pays rent quarterly in advance. The rent for 1st – 31st January 2020 is the only prepayment as at 31st December 2019.

vi. The accrued expenses relate to an unpaid bill for electricity used in December 2019. This is the only accrual as at 31st December 2019.

vii. 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. Cash and cheques received from customers were paid into the bank each day, after using some of the cash for expenses and personal drawings. In total, cash and cheques of £294,780 were banked.

2. Before banking the day’s takings, Phoebe took £1,250 a month from the shop’s takings for personal drawings. She also paid part-time staff wages of £350 a month, and used £100 a month to pay for other distribution and selling costs.

3. Inventory costing £194,745 was bought during the year. All items were bough on credit. On 31st December 2020, Phoebe’s file of unpaid invoices showed that suppliers were still owed £29,715.

4. The inventory as at 31st December 2020 cost £59,550.

5. Phoebe has a small number of credit customers. Customer statements show total trade receivables at 31st December 2020 to be £28,750. This includes a balance of £4,250 which is unlikely to be recovered and should be written off.

6. Phoebe pays rent quarterly in advance on 1st February, 1st May, 1st August, and 1st November. The rent was £81,000 a year but from 1st May 2020 it was reduced to £75,000 a year.

7. Electricity bills totalling £2,925 were paid during the year. At the end of December 2020, the bill for the quarter ended 31st January 2021 had not yet been received but was estimated to be £900.

8. Phoebe pays 4% interest on the long-term bank loan and 1% 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.

9. Other day-to-day business expenses totalling £750 were paid for by cheque as they arose.

10. On 31st December 2020, Phoebe decided to replace some fixtures and fittings that had cost £5,000 when purchased on 1st January 2016. She sold the old fixtures and fittings for £3,000 in cash. The new fixtures and fittings worth £7,500 were delivered on 31st December and will be paid for in January 2021. As this transaction took place at the end of the accounting period, Phoebe has decided to provide a full year’s depreciation on the old fixtures and fittings and none on the ones in this year’s accounts.

Required:

A. Using the information provided by Phoebe and Hilary’s Bistro statement of financial position as at 31st December 2019, prepare the following:

a. A table summarising the effects of all transactions and events listed above on assets, liabilities, equity, revenue, and expenses of Hilary’s Bistro.

b. A statement of profit or loss for 2020.

Revenue:

c. A statement of cash flows for 2020.

d. A statement of financial position as at 31st December 2020.

Show your workings.

B. Phoebe is considering expanding her business and registering it as a company. She asks you to discuss the advantages of disadvantages of running Hilary’s Bistro as a company instead of as a sole proprietorship. She would also like to learn about the additional sources of long-term financing that would become available once Hilary’s Bistro becomes a company.

C. Phoebe is quite concerned about the impact of the COVID-19 pandemic on her business.

a. She asks you to discuss the likely impact of the reduced customer traffic brought by local lockdowns on the short-term liquidity and long-term solvency of her business.

b. Use the figures from your report and last year’s statement of financial position to calculate the working capital figures for 2019 and 2020.

c. Use the figures from your report to calculate Hilary’s Bistro’s inventory days, receivables days, payables days, and the length of the cash conversion cycle.

d. The previous accountant estimated the firm’s 2019 cash conversion cycle to be 120 days. Comment on your findings from part b) and c).