Week 3 Tutorial

1. The statement of financial position of a company at the beginning of the month is as

follows:

Assets $ Liabilities and Equity $

Cash 50,000 Accounts Payable 22,000

Accounts Receivable 40,000 Loans Payable 70,000

Inventory 30,000 Capital (Equity) 128,000

Equipment 100,000

Total Assets 220,000 Total Liabilities + Equity 220,000

During the month the following transactions took place:

 Purchased equipment for $20,000 on credit.

 Sold goods for $25,000 that cost $15,000 to produce. Payment was received in cash.
 Collected $35,000 from accounts receivable.
 Paid down $30,000 on the loans payable.
 The owner withdrew $5,000 for personal use.
 Received a new loan for $50,000.
 Paid $10,000 to suppliers (accounts payable).
 Received an insurance claim as cash for a damaged piece of equipment, valued at
$5,000.

Requirement

Show the statement of financial position after all these transactions have been reflected.

Suggested Solutions
1. Purchased equipment for $20,000 on credit
o Equipment +$20,000
o Accounts Payable +$20,000
2. Sold goods for $25,000 that cost $15,000 to produce, received in cash
o Cash +$25,000
o Inventory –$15,000
o Profit (equity increases) +$10,000
3. Collected $35,000 from accounts receivable
o Cash +$35,000
o Accounts Receivable –$35,000
4. Paid down $30,000 on loans payable
o Cash –$30,000
o Loans Payable –$30,000
5. Owner withdrew $5,000 for personal use
o Cash –$5,000
o Equity –$5,000
6. Received a new loan for $50,000
o Cash +$50,000
o Loans Payable +$50,000
7. Paid $10,000 to suppliers (accounts payable)
o Cash –$10,000
o Accounts Payable –$10,000

8. Received an insurance claim as cash for a damaged equipment ($5,000)

 o Cash +$5,000
o Equipment –$5,000 (damaged)
o No gain/loss, assuming claim covers value
Updated Balances
Assets:

Asset Opening Change Closing

Cash 50,000 +70,000 120,000

Accounts Receivable 40,000 (35,000) 5,000

Inventory 30,000 (15,000) 15,000

Equipment 100,000 +15,000 115,000

Total Assets 255,000

Liabilities and Equity:

Liability / Equity Opening Change Closing

Accounts Payable 22,000 +10,000 –10,000 22,000

Loans Payable 70,000 –30,000 +50,000 90,000

Capital (Equity) 128,000 +10,000 –5,000 133,000

Total Liabilities + Equity 255,000

Final Statement of Financial Position:

Assets Amount ($) Liabilities & Equity Amount ($)

Cash 120,000 Accounts Payable 22,000

Accounts Receivable 5,000 Loans Payable 90,000

Inventory 15,000 Capital (Equity) 133,000

Equipment 115,000

Total Assets 255,000 Total liabilities and Equity 255,000

2- The assets of ABC company, are listed as follows:

 Cash at bank
 Plant and machinery
 Computer equipment
 Fixtures and fittings
 Office equipment
 Motor vehicles
 Freehold factory premises
 Stock of work-in-progress (i.e., partly completed goods)
 Short-term investments

(a) For the listed items, identify which assets should be classified as current assets and which
should be considered non-current assets.

(b) Can you determine which types of businesses might prefer using the liquidity basis over
the current/non-current basis for asset classification?

Suggested Solutions

(a) Classification of Assets into Current and Non-Current

 Asset Classification Reason

Cash at bank Current Asset Readily available for use; highly liquid

Long-term asset used in operations, not

Plant and machinery Non-Current Asset
intended for resale

Computer equipment Non-Current Asset Used across multiple accounting periods

Part of office/factory fit out, not consumed

Fixtures and fittings Non-Current Asset
within a single year

Used over the long term in business

Office equipment Non-Current Asset
operations

Used in business operations; not held for

Motor vehicles Non-Current Asset
short-term resale

Freehold factory premises Non-Current Asset Long-term property owned by the business

Stock of work-in-progress Expected to be completed and sold within

Current Asset
(WIP) the operating cycle

Expected to be sold or matured within 12

Short-term investments Current Asset
months

(b) Businesses That Might Prefer the Liquidity Basis

Liquidity basis refers to presenting assets in the order of how quickly they can be converted
into cash, rather than distinguishing between current and non-current.

Businesses likely to prefer this approach include:

1. Financial Institutions (e.g. banks, investment firms):

o Their operations are focused on liquidity management

o Balance sheets are often structured from most to least liquid assets

2. Businesses Undergoing Liquidation:

o The priority is to realise assets to pay creditors

o Liquidity-based presentation is more useful than time-based classification

3. Cash-Flow Focused Entities (e.g. early-stage startups or small trading businesses):

 o May prefer internal reporting based on liquidity to better manage cash flow
and short-term obligations

3 Question: Statement of Financial Position Preparation

The following information relates to Jennings Industrial Solutions as at 31 December 2018:

Account Amount (AUD)

Plant and machinery $150,000

Accounts payable $85,000

Bank overdraft $125,000

Inventory $210,000

Freehold premises $350,000

Long-term loans $250,000

Accounts receivable $220,000

Cash on hand $10,000

Motor vehicles $75,000

Fixtures and fittings $45,000

Intangible assets $50,000

Investments $90,000

Initial capital (1 Jan 2018) $730,000

Profit for the year $80,000

Drawings during the year $70,000

Requirement:

Using the information above:

1. Prepare a Statement of Financial Position as at 31 December 2018.

2. Classify assets and liabilities into current and non-current categories.

3. Show a clear calculation of the closing owner’s equity.

Solution: Statement of Financial Position

Jennings Industrial Solutions – As at 31 December 2018

Assets

Assets Amount (AUD)

Current Assets

Cash on hand $10,000

Accounts receivable $220,000

Inventory $210,000

Investments (short-term) $90,000

Total Current Assets $530,000

Non-Current Assets

Plant and machinery $150,000

Motor vehicles $75,000

Fixtures and fittings $45,000

Freehold premises $350,000

Intangible assets $50,000

Total Non-Current Assets $670,000

Total Assets $1,200,000

Liabilities and Owner’s Equity

Liabilities and Equity Amount (AUD)

Current Liabilities

Accounts payable $85,000

Bank overdraft $125,000

Total Current Liabilities $210,000

Non-Current Liabilities

Long-term loans $250,000

Liabilities and Equity Amount (AUD)

Total Non-Current Liabilities $250,000

Owner’s Equity

Opening capital $730,000

Add: Profit for the year $80,000

Less: Drawings ($70,000)

Closing Owner’s Equity $740,000

Total Liabilities and Equity $1,200,000