Photo AI
On 01/01/2021, M - Leaving Cert Accounting - Question 6 - 2022
Question 6
On 01/01/2021, M. McSharry lodged €1,350,000 into a business bank account and on the same day purchased a business for €1,325,000 which included the following tangib... show full transcript
Worked Solution & Example Answer:On 01/01/2021, M - Leaving Cert Accounting - Question 6 - 2022
Step 1
Prepare, with workings, a statement/balance sheet showing McSharry's profits or losses for the year ended 31/12/2021.
Answer
To prepare the statement of profits and losses for the year ended 31/12/2021, we calculate gross profit, total expenses, and net loss:
Calculating Sales and Gross Profit
Given that gross profit is estimated at 25% of sales, we have:
-
Sales Calculation:
- Let sales = .
- Gross Profit = 0.25 * and Cost of Sales = 0.75 * .
-
Cost of Sales:
- Start of Period Stock = €84,022
- Purchases = €747,568.21
- End of Period Stock = €741,418
- Cost of Sales = Start Stock + Purchases - End Stock = €84,022 + €747,568.21 - €741,418 = €90,172.21
-
Gross Profit:
- Gross Profit = Sales - Cost of Sales = .
-
Sales Calculation continues:
- .
-
Gross Profit: 0.25 * 120,229.61 = €30,057.40.
Listing Expenses
- Wages and General Expenses: €164,500
- Light and Heat: €4,140
- Rates: €2,000
- Cleaning Expenses: €4,000
- Loan Interest: €2,160
- Total Expenses: €164,500 + €4,140 + €2,000 + €4,000 + €2,160 = €176,800.
Net Loss Calculation
Net Loss = Gross Profit - Total Expenses = €30,057.40 - €176,800 = -€146,742.60.
Final Statement
| Particulars | Amount (€) |
|---|---|
| Sales | 120,229.61 |
| Less: Cost of Sales | (90,172.21) |
| Gross Profit | 30,057.40 |
| Less: Total Expenses | (176,800) |
| Net Loss | (146,742.60) |
Step 2
Prepare a trading profit and loss account, in as much detail as possible, for the year ended 31/12/2021.
Answer
Trading Profit and Loss Account for the Year Ending 31/12/2021
Revenue:
- Sales: €120,229.61
Cost of Sales:
- Opening Stock: €84,022
- Add: Purchases: €747,568.21
- Less: Closing Stock: €741,418
- Cost of Sales Total: €90,172.21
Gross Profit:
- Sales - Cost of Sales = 120,229.61 - 90,172.21 = €30,057.40
Operating Expenses:
- Wages and General Expenses: €164,500
- Light and Heat: €4,140
- Cleaning Expenses: €4,000
- Rates: €2,000
- Loan Interest: €2,160
- Total Operating Expenses: €176,800
Net Loss:
- Gross Profit - Total Operating Expenses = 30,057.40 - 176,800 = (146,742.60)
Step 3
Explain two fundamental accounting concepts, with reference to how they apply to the accounts of McSharry.
Answer
Fundamental Accounting Concepts
1. Going Concern
The going concern concept implies that the business will continue to operate in the foreseeable future. For McSharry, this means assuming that the operations can sustain themselves amidst losses faced. In preparing accounts for McSharry, it must be established that foreseeable cash flows will continue to support business operations and thus financial statements are prepared under the going concern assumption.
2. Accruals (Matching)
The accruals concept indicates that expenses and revenues must be recognized when they are incurred or earned, regardless of when cash is exchanged. McSharry has adhered to this by accounting for income such as investment income when it is earned rather than when received. Expenses were matched to the period they relate to, for example, incorporating periodical loan repayments into expenses even if they were not fully paid in cash by year-end.