F3 Question (Urgent)

[carolyn]

F3 Question

A business started with a bank balance of $3250, and it subsequently purchsed goods on credit for $10000. Gross prpfit mark-up is 120% and half the goods were sold. They were sold for cash, less a cash discount of 5 %. All taking were banked.
The resulting net profit was:

A. $700
B. $3700
C. $5450
D. $5700


Answer is C.Why???pls explain to me.
Thank for u help.

[Dagabie]

F3 QUESTION (URGENT)

Hello! carlyn,

Since you know the profit to be $5450 I will go ahead to explain why the profit is $5450.

Sales (Purchases $10,000 X 1/2 X 2.20) $11,000

Less cost of sales (Purchases $10,000 X 1/2) ($5,000)

Gross profit ($11,000 - $5,000) $6,000

Less cash discount allowed (cash sales $11,000 x 5%) ($550)

Therefore NET PROFIT ($6,000 - $550) $5,450.


If you are confused because he started with Bank balance of $3,250 noted that the purchases was on credit he did not pay for goods.

A simple cashflow analysis may also help you understand:

CASH FLOW ANALYSIS

Net profit $5,450

Less increase in stock
(Purch.$10,000 x1/2) ($5,000)
Add increase in creditors $10,000

Net cash inflow ($5,450 + $10,000 - $5,000) = $10,450

Add cash at bank at start of business $3,250

Balance at bank at close of business ($10,450 + $3,250) = $13,700.

If the creditors are eventually paid ($13,700 - $10,000) only $3,700 will be left at the bank and there is stock at cost of $5,000 which may be sold for ($5,000 x 2.20)$11,000.

[carolyn]

Hi. thanks
could you explain one more question for me ?Thanks you so much!!

The draft accounts of Richardson show a profit of $50000
You ascertain that:

(i)Cash drawings of $5000 have not been recorded anywhere.
(ii)The charge for repairs was exceptionally large because it included the entire cost of the new van bought during the year for $7000.
(iii)An allowance of $250 in payables should be romoved.
(iv)Richardson withdrew goods costing $750 for private comsumption but omitted to record the fact.
(v)Richardson's accounting policy is to depreciate non current assets in equal installments over four years begining in the year of acquisition.


What is the revised profit figure?
A.$51250
B.$55500
C.$56250
D.$58000


The answer is C.

[Dagabie]

DRAFT ACCOUNTS OF RICHARDSON

Hi Carolyn,

I am always prepared to explain more questions to you if I can do so.

Please I shall use journal entries to avoid writing plenty.

JOURNAL
(i) Dr Drawings a/c $5,000
Cr Cash a/c $5,000
Being payment of cash drawings omitted.

This cash drawings omitted which does not affect the Income statement.

(ii) Dr Van a/c $7,000
Cr Income statement a/c $7,000
Being reversal of capital expenditure
charged to income statement as revenue expenditure(expense).

(iii) Dr Payables a/c $250
Cr Allowance a/c $250
Being reversal of allowance wrongly credited to Payables a/c.

Again you have to

Dr Allowance a/c $250
Cr Income Statement a/c $250
Being transfer of allowance receivable to Income Statement a/c.

Please note that Payables have credit balances, so since there was no indication the sort of allowance and it was credited to Payables(Creditors) a/c we assume it is allowance receivable.

(iv) Dr Drawings a/c $750
Cr Income Statement(Purchases) $750
Being correction of goods drawn for personal use omitted.

The treatment of goods drawn for personal use is that Purchases should be reduced by the amount of goods drawn for personal use. Richardson did not buy the goods, he is chopping part of his Capital by way of drawings. If Purchases were reduced, the cost of goods sold would have been lower by $750 and profits will increased by $750.

The correction now is to add $750 to the Profit of $50,000 which has been reduced because the correct treatment above was omitted.

(vi) Dr Income Statement(depreciation) $1,750
($7,000 / 4yrs = $1,750p.a.)
Cr Provision for Depreciation a/c $1,750
Being depreciation charged for the year.



RICHARDSON
DRAFT INCOME STATEMENT FOR THE YEAR

Profit per draft accounts $50,000
Add:
Goods drawn $750
Allowance receivable $250
Capital expenditure $7,000
Less:
Depreciation ($1,750)

ADJUSTED PROFIT $56,250