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QUESTION 3 (18 Marks: 24 Minutes)
The following is T Allen’s statement of financial position at 31December 2006 and statement of changes in equity for the year ended31 December 2006 together with comparative figures for 2005.
T ALLEN
STATEMENT OF FINANCIAL POSITION
AT 31 DECEMBER
2006
R
2005
R
ASSETS
Non-current assets
70 000
30 000
Furniture at cost
100 000
50 000
Accumulated depreciation
(30 000)
(20 000)
Current assets
530 000
470 000
Inventory
330 000
270 000
Accounts receivable
200 000
120 000
Cash at bank
-
80 000
600 000
500 000
EQUITY AND LIABILITIES
Capital and reserves
Capital
200 000
300 000
Current liabilities
400 000
200 000
Accounts payable
300 000
200 000
Bank overdraft
100 000
-
600 000
500 000
T ALLEN
STATEMENT OF CHANGES IN EQUITY
FOR THE YEAR ENDED 31 DECEMBER
Capital
R
Balance at 1 January 2005 200 000
Profit for the period 200 000
Withdrawals (100 000)
Balance at 31 December 2005 300 000
Profit for the period 100 000
Withdrawals (200 000)
Balance at 31 December 2006 200 000
Page 20 of 21
You are required to:
a) Prepare a statement of cash flows to explain why in spite of thefact that a profit has been earned during the year ended 31December 2006, the business is in financial difficulties. Use theindirect method.
b) Explain the three main reasons why the business has gone intooverdraft at 31 December 2006.