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Angela Riziki started a wholesale business on 1 July 2023 by depositing Sh. 12,000,000 into a business bank account. Angela did not maintain a full set of accounting records. The following transactions took place during the year ended 30 June 2024:

1. Brought in her personal pick-up van valued at Sh. 6,000,000 to be used in the business. The van was estimated to have an economic useful life of 4 years as of 1 July 2023.

2. On 31 December 2023, she took a bank loan of Sh. 4,000,000 at an interest rate of 15% per annum. At the end of the year, the loan interest was in arrears.

3. During the year ended 30 June 2024, Angela purchased goods amounting to Sh. 79,000,000 on credit and Sh. 6,000,000 in cash, paid through the bank. As of 30 June 2024, Sh. 3,000,000 accounts payable to suppliers was still outstanding.

4. Credit sales during the year amounted to Sh. 125,000,000 while cash sales amounted to Sh. 6,500,000. A customer who owed Sh. 1,500,000 was declared bankrupt, and the debt had to be written off. By 30 June 2024, accounts receivable stood at Sh. 5,500,000.

5. During the year, Angela spent Sh. 2,500,000 of the cash sales received for her personal use and Sh. 1,200,000 to pay for telephone and water bills. The balance was banked.

6. Discount received and discount allowed during the year ended 30 June 2024 amounted to Sh. 1,800,000 and Sh. 1,100,000, respectively.

7. As of 30 June 2024, inventory was valued at Sh. 7,200,000.

8. Credit suppliers and credit customers are paid and pay through the bank, respectively.

9. The following payments were made through the bank during the year:

| Expenses | Sh."000" |
| ---------------------------------- | -------: |
| Rent expenses | 3,600 |
| Purchase of furniture (1 July 2023)| 8,000 |
| Salaries and wages | 11,000 |
| Transport | 4,200 |
| Insurance | 2,800 |
| Advertisement | 2,100 |
| Repair of motor vehicle (van) | 850 |
| Electricity and internet | 2,200 |
| Carriage inwards | 2,500 |

Furniture was to be depreciated at the rate of 15% per annum on a straight-line basis.

As of 30 June 2024, electricity bills unpaid amounted to Sh. 450,000, while insurance prepaid was Sh. 1,200,000.

Required:

(a) Prepare the Statement of Profit or Loss for the year ended 30 June 2024.

(b) Prepare the Statement of Financial Position as at 30 June 2024.

Answer :

Let's go over how to prepare the statement of profit or loss and the statement of financial position for Angela Riziki's business from the information provided.

Statement of Profit or Loss for the Year Ended 30 June 2024

Revenues:

  • Credit Sales: [tex]Sh.125,000,000[/tex]
  • Cash Sales: [tex]Sh.6,500,000[/tex]

Less: Sales Returns and Allowances (not provided, assumed as zero)

Total Revenue: [tex]Sh.131,500,000[/tex]

Less: Cost of Goods Sold (COGS):

  • Purchases on Credit: [tex]Sh.79,000,000[/tex]
  • Cash Purchases: [tex]Sh.6,000,000[/tex]
  • Less: Closing Inventory: [tex]Sh.7,200,000[/tex]

COGS = Purchases - Closing Inventory = Sh.79,000,000 + Sh.6,000,000 - Sh.7,200,000 = Sh.77,800,000

Gross Profit: [tex]Sh.131,500,000 - Sh.77,800,000 = Sh.53,700,000[/tex]

Less Operating Expenses:

  • Telephone and Water: [tex]Sh.1,200,000[/tex]
  • Rent: [tex]Sh.3,600,000[/tex]
  • Salaries and Wages: [tex]Sh.11,000,000[/tex]
  • Transport: [tex]Sh.4,200,000[/tex]
  • Insurance: [tex]Sh.2,800,000 - Sh.1,200,000 \text{ (prepaid)} = Sh.1,600,000[/tex]
  • Advertisement: [tex]Sh.2,100,000[/tex]
  • Repairs: [tex]Sh.850,000[/tex]
  • Electricity and Internet: [tex]Sh.2,200,000 + Sh.450,000 \text{ (unpaid)} = Sh.2,650,000[/tex]

Total Operating Expenses = Sh.27,200,000

Operating Income = Gross Profit - Operating Expenses = Sh.53,700,000 - Sh.27,200,000 = Sh.26,500,000

Add: Discount Received: [tex]Sh.1,800,000[/tex]
Less: Discount Allowed: [tex]Sh.1,100,000[/tex]

Net Operating Income = Sh.26,500,000 + Sh.1,800,000 - Sh.1,100,000 = Sh.27,200,000

Less: Finance Cost (Interest on Loan):

  • Interest: [tex]Sh.4,000,000 \times 15\% = Sh.600,000[/tex]

Profit Before Tax = Net Operating Income - Finance Cost = Sh.27,200,000 - Sh.600,000 = Sh.26,600,000

Statement of Financial Position as at 30 June 2024

Assets

Non-Current Assets:

  • Van (\text{less Accumulated Depreciation}):

    • Cost: [tex]Sh.6,000,000[/tex]
    • Depreciation: [tex]Sh.6,000,000 / 4 = Sh.1,500,000[/tex]
    • Book Value: [tex]Sh.6,000,000 - Sh.1,500,000 = Sh.4,500,000[/tex]

  • Furniture (\text{less Accumulated Depreciation}):

    • Cost: [tex]Sh.8,000,000[/tex]
    • Depreciation: [tex]Sh.8,000,000 \times 15\% = Sh.1,200,000[/tex]
    • Book Value: [tex]Sh.8,000,000 - Sh.1,200,000 = Sh.6,800,000[/tex]

  • Total Non-Current Assets = Sh.11,300,000

Current Assets:

  • Inventory: [tex]Sh.7,200,000[/tex]
  • Accounts Receivable: [tex]Sh.5,500,000[/tex]
  • Bank Balance: Calculated Below
  • Insurance Prepaid: [tex]Sh.1,200,000[/tex]

Total Current Assets (Excluding Bank): Sh.13,900,000

Liabilities

Current Liabilities:

  • Accounts Payable: [tex]Sh.3,000,000[/tex]
  • Loan Interest Payable: [tex]Sh.600,000[/tex]
  • Electricity Payable: [tex]Sh.450,000[/tex]

Total Current Liabilities = Sh.4,050,000

Non-Current Liabilities:

  • Bank Loan: [tex]Sh.4,000,000[/tex]

Owner’s Equity:

  • Initial Capital: [tex]Sh.12,000,000[/tex]
  • Add: Capital Contributions (Van): [tex]Sh.6,000,000[/tex]
  • Add: Retained Earnings (Profit for the Year): [tex]Sh.26,600,000[/tex]
  • Less: Drawings: [tex]Sh.2,500,000[/tex]

Total Owner’s Equity = Sh.42,100,000

To calculate the "Bank Balance", let's consider:

  • Initial capital: [tex]Sh.12,000,000[/tex]
  • Cash Sales banked: [tex]Sh.6,500,000 - Sh.2,500,000 = Sh.4,000,000[/tex]
  • Loan received: [tex]Sh.4,000,000[/tex]
  • Payments through bank (Expenses + Purchases): [tex]Sh.3,600,000 + Sh.8,000,000 + Sh.11,000,000 + Sh.4,200,000 + Sh.1,600,000 + Sh.2,100,000 + Sh.850,000 + Sh.2,650,000 + Sh.2,500,000 = Sh.36,500,000[/tex]

Bank Account: Sh.12,000,000 + Sh.4,000,000 (Loan) + Sh.4,000,000 - Sh.36,500,000 = Sh.-16,500,000 (Overdrawn)

If the account is negative, it indicates an overdraft or borrowing from the bank.

Total Assets = Total Non-Current Assets + Current Assets - Bank Overdraft: Sh.11,300,000 + Sh.13,900,000 - Sh.16,500,000 = Sh.8,700,000

Total Liabilities and Owner’s Equity = Sh.4,050,000 + Sh.4,000,000 + Sh.42,100,000 = Sh.50,150,000

Note: The statements here serve as guidance. Bank account calculations and final balances would typically require separate confirmation in a perfect business setting where all reconciliations are accurately accounted for.

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Rewritten by : Barada