Live Session 4

LIVE SESSION 4
QUESTIONS TO SUBMIT
Question 1: Prudence Pipe

Prudence Pipe runs a business from her home selling jewellery and clothes. Her regular
customers make purchases on credit and any other customers pay by cheque. Prudence does
not keep full accounting records and she has asked you to help her produce some financial
statements for the year to 31 March 20X1, using the information that you are given below:
Prudence Pipe: Statement of financial position at 31 March 20X0
£ £ £
Non-current assets
Car: cost 12,500
Less: accumulated depreciation (2,000)
10,500
Current assets
Inventory 5,500
Trade receivables 2,200
Less: provision for doubtful debts (44) 2,156
Cash at bank 11,644
19,300
Total assets 29,800
Liabilities and equity

Current liabilities
Trade payables 4,500
Other payables 148
4,648
Non-current liabilities: Bank loan 10,000
Total liabilities 14,648
Equity: Proprietor’s capital 15,152
Liabilities and equity 29,800
Additional information
An analysis of the bank statements for the year to 31 March 20X1 shows the following:
£
Cash banked from debtors 58,600
Other cash banked from sales 67,800
Cash received from sale of car 8,500
Cash paid for new car (15,400)
Payments to trade creditors (91,724)
Wages (6,200)
Sundry expenses, including telephone (3,250)
Drawings (6,500)
Cash at bank at 31.3.X1 23,470
1. Prudence sells all of her goods at a 50% mark-up on cost.

2. During the year Prudence paid £4,200 of her cash takings into her
personal bank account.
3. The wages shown in note 1 were paid to Prudence’s daughter, Phillipa,
who helps her at the clothes parties. Phillipa also received £3,200 of
cheques directly from customers (that is, they were made out to her
directly rather than to the business).
4. The new car is to be depreciated on a straight-line basis over four years,
at which time its expected resale value is £5,400.
5. Inventory at 31 March 20X1 was valued at £7,000.
6. Prudence is unable to tell you what she owes her trade payables at 31
March 20X1.
7. Other payables at 31 March 20X0 consisted of an accrual for Prudence’s
business telephone bill. An invoice for telephone expenses for the
quarter to 31 March 20X1, amounting to £215, was received after the
year-end.
8. Prudence’s records of her receivables show that payments had not been
received in respect of invoices amounting to £3,868 at 31 March 20X1.
A review of these invoices showed that one for £368 related to a
customer who has been declared bankrupt with no chance of any money
being repaid.
9. The accounts for Prudence are to include a general provision for
doubtful debts of two per cent of receivables.
10. Interest on the bank loan at 10% p.a. is due for the year to 31 March
20X1.
Required:
a. An income statement for the year to 31 March 20X1 and a statement of financial
position at that date.
b. A note to Prudence explaining the benefits of performing regular reviews of her
outstanding receivables and payables.
Question 2: Westworld
Westworld is a shop which sells Wild West souvenirs and memorabilia. The owner of
Westworld Ltd has prepared the following trial balance as at 31 July 20X1 from her
accounting records:
Dr Cr
£ £
Cash 550
Capital invested 1,000
Land and buildings 50,000
Fixtures and fittings 500
Mortgage 50,000
Sales 23,255
Trade payables 2,020
Inventory on 1 August 20X0 3,640
Purchases 15,245
Wages of sales assistant 6,500
Retained profits as at 1 August 20X0 260
111,190 41,780
The owner does not understand why her trial balance does not balance and asks for your help.
On investigation, you discover the following information:
1. Inventory held on 31 July 20X1 cost £3,380.
2. Cash in the trial balance agrees to the balance in the cash book. However, when the
amounts in the cash book were added up a receipt of £100 from a customer was
omitted from the addition of the cash book.
3. A cheque for £40 received from a customer has not yet cleared into the bank account.
4. Bank charges of £30 for the month of July are included in the bank statement but have
not yet been entered into the cash book.
5. Westworld has not yet paid mortgage interest of £500 owed for the year ended 31 July
20X1.
6. Trade payables in the trial balance agrees with the figure on the payables control
account. However, a purchase of £470 was correctly recorded in the payables ledger
but was added as £440 in the purchases day book.
7. A payment of £20 to a supplier was correctly included in the cash book but was
omitted from the payables ledger itself.
Required:
a) The bank statement of Westworld reports a balance of £580 on 31 July 20X1.
Prepare a statement reconciling the bank account balance to the figure for cash in the
trial balance.
b) The total of individual balances on the payables ledger as at 31 July 20X1 is £2,070.
Prepare a statement reconciling the balance on the payables ledger to the figure for
trade payables in the trial balance.
c) Prepare a corrected trial balance for Westworld as at 31 July 20X1.
d) Explain briefly to the owner of Westworld the meaning and importance of internal
control. How can preparing the trial balance, and performing regular bank and control
account reconciliations, help to ensure that the figures in the financial statements are
correct?

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Question 1: Prudence Pipe

Liabilities and equity

1. Prudence sells all of her goods at a 50% mark-up on cost.

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