| Fundamentals of Financial Decision-Making |
A Harvard standard referencing is required for this assignment.
Part A.
Section 1
Lee is a sole trader who started trading on 1st January 2023. As a trainee financial manager, you have been presented with a summary of transactions that occurred during the first year of trading.
| Transaction | Details |
|---|---|
| 1 | Lee (the owner) introduced £200,000 of equity, which was paid into a bank account opened in the name of the business. |
| 2 | Inventories totaling £50,000 was bought using cash. |
| 3 | Equipment was bought on 1/1/2023 for £30,000. This is expected to be used in the business for five years and then to be sold for £5,000. |
| 4 | Bought inventories costing £40,000 on credit. |
| 5 | Premises were rented from 1/1/2023 at an annual rental of £50,000. During the year, rent of £75,000 was paid to the owner of the premises. |
| 6 | The electricity bill for the final quarter was not received before the accounts were prepared. The business estimated the electricity expense would be £7,500 for the final quarter, resulting in a total estimated electricity expense for the year of £30,000, which was paid in cash. Just before the accounts were finalised, the electricity bill for the final quarter was received for an amount of £9,000. The supplier will allow Lee to pay the balance when the next quarterly payment is due. |
| 7 | Paid general expenses of £25,000 |
| 8 | Sales revenue on credit totaled £75,000 (cost of sales £47,000) |
| 9 | Cash sales revenue totaled £70,000 (cost of sales £42,000) |
| 10 | Lee withdrew £30,000 in cash for personal use. |
| 11 | Payment of trade payables totaled £30,000 |
| 12 | Receipts from trade receivables totaled £38,000 |
| 13 | During the final quarter, Lee purchases advertising on google ads. The cost of the advertising is £5,000 The expense is recognised immediately; payment for the airtime is delayed until next accounting year. |
The business uses the straight-line method for depreciating non-current assets.
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Required:
i. Record the transactions using double-entry bookkeeping* and prepare a trial balance.
Note (*double entry (t-accounts) workings do not need to be submitted with your assignment.)
(15 marks)
ii. Prepare an statement of performance and a statement of financial position for the year end.
(10 marks)
Section 2
Profit and cash generated during an accounting period are rarely equal. Discuss the importance of cash management in general and why liquidity is vital for a start-up business.
(25 marks)