MME40001 Engineering Management 2 Topic: Balance Sheet

Tutorial 1: Statement of Financial Position

Problem 1:
State which of the following items could appear as an asset or as a liability on the balance sheet of
business A? Explain your reasoning in each case?
1. $1,000 owing to business A by a customer who will never be able to pay.
2. $2,000 owing to business B for the satisfactory supply of goods during the past month
3. A provision (estimate) is made each year of $50,000 for relining the blast furnace, which takes place every
three years. The current estimate is $100,000
4. Magazine subscriptions worth $27,400 have been received in advance by a publisher.
5. The purchase of a license from business B giving business A the right to produce a product designed by
business B. Production of this new product is expected to increase profits over the period in which
business A holds the license.
6. The purchase of a machine which will save $10,000 per annum. It is currently being used by business A
but it has been acquired on credit and is not pet paid for.
7. The hiring of a new marketing director who is confidently expected to increase profits by at least 30% over
the next three years.
8. The business has guaranteed a manager’s personal loan of $100,000. The manager has maintained the
account in good order and $79,000 is currently in owing.
9. There is a legal claim against the business for negligence over faulty workmanship. It is likely they will
settle out of court for $50,000.

Problem 2:
Complete the table by inserting the missing figures
(a) (b) (c) (d)
Current assets 13,900 18,300 13,200 ?
Non-current assets 51,600 71,600 110,700 69,600
Current Liabilities 14,200 11,900 9,600 17,500
Non-current liabilities 17,900 ? 41,500 51,200
Opening capital 20,700 29,200 ? 26,700
Profit or loss 19,600 17,900 37,400 (9,500)
Drawings ? 8,700 11,700 7,200

Problem 3:
The following is a list of the assets and claims of Crafty Engineering Ltd. as at 30 June 2013.
Creditors 86,000.00
Motor Vehicles 38,000.00
Loan from George Bank 260,000.00
Machinery and Tool 207,000.00
Bank Overdraft 116,000.00
Inventory 153,000.00
Freehold Premises 320,000.00
Debtors 185,000.00

a) Using the vertical format prepare the balance sheet of the business as at 30 June 2013
b) Discuss the significant features revealed by this financial report.

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 1
 Problem 4:
You are provided with the following balance sheet at the start of the week and the seven transactions for the
week. Complete the table to show how each transaction affected the accounts together with the balances at
the end of the period

beginning Trans’n Trans’n Trans’n Trans’n Trans’n Trans’n Trans’n Ending

Assets $ 1 2 3 4 5 6 7
Cash 3,000
Accounts
receivable 5,000
Inventory 7,000
Freehold premises 60,000
Furniture & fittings 18,000
Total Assets 93,000
Liabilities
Trade Creditors 3,000
Bank Loan 30,000
Total Liabilities 33,000
Capital 60,000
Total Liabilities +
capital 93,000

Transactions for the week:

1. Purchased inventory on credit for $5,000
2. Collected $4,000 from customers
3. Sales: Cash $2,000 (cost $1,500)
Credit $6,000 (cost $4,500)
4. Paid creditors $7,000
5. Owner’s additional cash contribution $10,000
6. Purchased furniture for cash $6,000
7. Loan repayment of $2,000

Problem 5:
The balance sheet of a business at the start of a week is as follows:

Assets Claims
Trade debtors 33,000.00 Trade creditors 23,000.00
Inventory 28,000.00 Bank Overdraft 43,000.00
Furniture & fittings 63,000.00 Owner's equity 203,000.00
Freehold premises 145,000.00
Total liabilities & Owner's
Total assets 269,000.00 equity 269,000.00

During the week the following transactions take place:

i. Sold inventory for $11,000 cash. This inventory has cost $8,000
ii. Sold inventory for $23,000 on credit. This inventory had cost $17,000
iii. Received cash from trade debtors totaling $18,000

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 2
 iv. The owners of the business introduced $100,000 of their own money which was placed in a business
account.
v. The owners bought a motor vehicle, valued at $10,000, to be used in the business.
vi. Bought inventory on credit for $14,000
vii. Paid trade creditors $13,000.

Prepare the balance sheet after all these transaction have been reflected.

Problem 6:
On 1 March 2014 Joe Conday started a new business. During March he carried out the following
transactions:

March 1 Deposited $20,000 cash in a bank account.

2 Purchased fixtures and fittings for $6,000 cash, and inventory valued at $8,000 on credit.
3 Borrowed $5,000 from relative and deposited it in the bank.
4 Purchased a car for $7,000 cash and withdrew $200 for own use.
5 Purchased another car costing $9,000. The car purchased on 4 March was given in part exchange
at a value of $6,500. The balance of purchase price for the new car was paid in cash.
6 Conday won $2,000 in a lottery and paid the amount into the business bank account. He also
repaid $1,000 of the loan.

a) Prepare a balance sheet for the business at the end of each day using horizontal format.
b) Prepare the balance sheet in vertical format as at 6 March 2014.

Problem 7:
Provide a report based on your evaluation of the following three balance sheets in terms of:
(a) Liquidity
(b) Solvency
(c) Asset mix
A B C
$’000 $’000 $’000
Current assets 500 300 700
Non-current assets 500 700 300
Total assets 1000 1000 1000
Current liabilities 300 100 100
Non-current liabilities 200 200 600
Total liabilities 500 300 700
Owner’s contributions 400 100 200
Reserves 100 600 100
Total owner’s equity 500 700 300

Abstracted from Atrill, Mclaney, Harvey, and Jenner, Accounting An Introduction, 4e, 2009. Pearson. 3