You are considering setting up a public relations business. A number of your college friends from DkIT have expressed an interest in assisting you in the new venture.



The following notes accompany the trial balance.

Closing inventory at 30 November 2020 amounted to €85,000.

Depreciation on buildings should be provided on a straight-line basis of 


The bad debts provision should be adjusted to 6% of receivables.

There was unrecorded rent receivable of €5,000 at the year end.

Accrue €11,000 of mortgage interest charges at the year end.

The salaries figure includes €36,000 which was paid to Mae East.

General expenses include a prepayment of €7,000.

You are required to:

Prepare an income statement for the business for the year ending 30 November 2020.                 (22 marks)

Prepare a statement of financial position for the business at 30 November 2020.         

          (18 marks)

Question 2 Total 40 Marks

The following are extracts from the financial statements of Clarke plc for 2020 and 2019.

Income statement Year Ending 31/12 2020 2019

Sales 744,000 624,000

Less Cost of Sales

Opening Inventory 55,200 67,200

Add Purchases 585,600 420,000

Less Closing Inventory 64,800 55,200

Cost of Sales 576,000 432,000

Gross Profit 168,000 192,000

Less Total Operating Expenses 132,000 98,400

Operating Profit 36,000 93,600

Corporation Tax 4,800 12,000

Profit After Tax 31,200 81,600

Statement of Financial Position at 31/12/2020 31/12/2019

Non-Current Assets

Cost 2,352,,000 2,064,000

Provision for Accumulated Depreciation (972,000) (816,000)

Total Non-Current Assets at Net Book Value 1,380,000 1,248,000

Current Assets

Inventory 64,800 55,200

Receivables 132,000 72,000

Cash and Bank Balances 2,400 0

Total Current Assets 199,200 127,200

Total Assets 1,579,200 1,375,200


Issued Share Capital of €1 960,000 840,000

Retained Profits 141,200 150,600

Total Equity 1,101,200 990,600

Long Term Liabilities

5 % Loan due in 2028 266,400 218,400

Current Liabilities

Payables 158,400 86,400

Bank Overdraft 53,200 79,800

Total Current Liabilities 211,600 166,200

Total Equity and Liabilities 1,579,200 1,375,200

Question 2 continues on the next page

Question 2 continued           

You are required to:

                   (30 marks)


Calculate the ratios listed below for both years 2 marks per ratio

Show clearly how you calculated the ratio 1 mark per ratio


Give 1 reason why the ratio may have changed from 2019 to 2020, referring to the figures in the financial statements if relevant.

  2 marks per ratio.

The ratio you should calculate are;

Gross margin 5 marks in total

Operating Margin 5 marks in total

Days sales in closing inventory 5 marks in total

Usage of non-current (fixed) assets 5 marks in total

Days purchases in payables and 5 marks in total

The Gearing ratio. 5 marks in total

(i) Calculate the company’s net cash flow for 2020 and explain in 1 sentence what your 

    answer means.             (6 marks)

(ii) From a review of the company’s financial statements (no additional calculations are 


     Provide 2 possible reasons for the net cash flow in 2020. (4 marks)

Question 3 Total 20 Marks

Answer Part A OR Part B

Part A.

The figures in the income statement are calculated/included because accountants apply the Matching concept and the Prudence Concept.

Explain what each concept means and how it affects any 1 figure in the Income Statement                    (12 marks)

Explain any 2 differences between financial accounting and management accounting.

                                          (8 marks)


Part B

You are considering setting up a public relations business. A number of your college friends from DkIT have expressed an interest in assisting you in the new venture. 

You are now considering if you should set up the business as a sole trader, a partnership or a limited liability company

Explain one advantage and one disadvantage of each of these methods of operating your business                    (12 marks)

Describe how the income statement and the statement of financial position differ between a sole trader and a limited liability company. 

            (8 marks)



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