Introduction to Accounting and Finance: Income Statement, Balance Sheet, Break Even Point, Investment Appraisal Techniques

UGB 163 Introduction
to Accounting and
Finance

INTRODUCTION
Accounting simply means to record the day to day activities of business. On the other
hand, finance refers to a broader term which focuses on handling of assets and liabilities of
business. Both the terms are equally important for the business as they are the base of financial
position of company. Accuracy in these helps it in knowing the accurate knowledge of the
performance of business through it can take its strategic decisions (Abernathy, And et.al., 2019).
The report is divided into three parts. The first question deals with the preparation of income
statement and balance sheet. The second part provides solution for the calculation of break even
point and the margin of safety, along with checking out that whether different types of budgets
are relevant for all types of businesses or not. Third section analysis a project for deciding that
the offer should be accepted or not, in addition to evaluating about merits and disadvantages of
different techniques of investment appraisal. It also provides pros and cons of budget in making
plan of company.
TASK
Question 1: Produce an income statement and balance sheet of Tom and Jerry Ltd.
Profit and loss account of Tom and Jerry Ltd. for the year ending 30st December, 2020
Particulars £ £
Sales revenue 633000
- Cash sales 504000
- Credit sales 129000
Less: Cost of goods sold 644175
Purchases (486000 + 39000) 525000
Wages 117000 119175
Add: Outstanding 2175
Add: Closing Stock 228000
Gross Profit 216825
Less: Operating Expenses 148200

Depreciation on Van 9600
Electricity bill 5700 7725
Add: outstanding 2025
Rent 112500 90000
Less : Prepaid rent 22500
Rates 6900 5775
Less: Prepaid rates 1125
Van running expenses 33600
Provision for doubtful debts 1500
Net Profit 68625
Statement of financial position of Tom and Jerry Ltd. as on 30st December, 2020
Assets £ £
Delivery van 60000 50400
Less: Depreciation 9600
Current Assets 597525
Prepaid rates 1125
Prepaid rent 22500
bank 281400
Inventory 228000
Trade receivables 66000 64500
Less : Provision for doubtful debts 1500
Total 647925
Liabilities and capital £ £
Equity 180000 248625

Less: Profit 68625
Long term Borrowing 302100
Current Liabilities 97200
Wages outstanding 2175
Outstanding electricity bill 2025
Trade payables 93000
Total 647925
Working Notes:
 Prepaid rent = 112500 – 90000 = £ 22500
 Prepaid rates for the time period of 1st January, 2021 to 31st March, 2021
Prepaid rates = 4500 * 3 / 12 = £1125
 Depreciation on van = (Price – scrap value) / Number of years
= (60000 – 12000) / 5
= 48000 / 5
= £ 9600
 Calculation of cash at bank
Balance in beginning = £ 180000
less: paid for inventory = £ 39000
Add: cash sales = £ 129000
Add: cash received from trade receivables = £ 438000
Less : paid to trade payables = £ 393000
Less: Van running expenses = £ 33600
Balance = £ 281400
 Calculation of trade receivables
Credit sales = £ 504000
Less: received £ 438000
Balance = £ 66000
 Calculation of trade payables