Question

Schutz Building Services is a fast-growing business in the housing industry. Johan Schutz started the business three years ago and has worked hard to establish the firm. Johan has no accounting knowledge and simply keeps his invoices and receipts in a shoebox that he takes to his accountant once a year to be sorted out and turned into financial statements for tax purposes. Johan does not use financial statements for decision making. So long as he has cash in the bank, Johan is satisfied with how his business is operating. Unfortunately, Johan’s accountant has suddenly left the country and retired to South America. Johan is negotiating a contract with a supplier of building materials who wants to see his financial statements to ensure that Johan can meet his payments each month. Johan has asked you to prepare financial statements. Based on his last tax return and the contents of his shoebox for this year, you have established the following items.

Cash in the shoebox (with the receipts and invoices) $500

Cash in the bank account $3800

Building services provided $550,000

Amount owed by customers $80,000

Wages paid to employees $150,000

Wages owed to the employees $3500

Equipment $68,000, Building supplies used $310,000

Building supplies on hand $18,000

Amounts owed to suppliers $30,000

Motor Vehicle $32,000

Motor vehicle expenses $5600

Electricity and telephone expenses $4000

Cash used by Johan for personal expenditure $5700

Question 1: Using the information, provide a profit and loss statement and a balance sheet in narrative form for Schutz Building Services for the current period. Complete the statements in the forms provided below.

Question 2: How would the financial statements you produce help the supplier of building materials decide whether to trade with Johan? What parts of the financial statements would be positive indicators that Schutz Building Services would pay for supplies on time and what items may cause some concern for the supplier?

Answer 1

The Schultz building services has following income balance sheet in his business,

Revenue of $ 550,000 and cost of supplies is $ 310,000 along with other expenses the total expenses is $ 163,100 ( 150,000 + 3500+ 5600+ 4000 ), this is making of net profit of $ 76,900.

Current assets of $ 80,000 of trade receivable and $18,000 of supplies along with cash of $ 4,300, making total of it to $ 102,300

Non current assets of, $ 68,000 and $ 32,000 of equipment and moter vehicle respectively.

This make total asset of $ 202,300.

Current liabilities of $ 3,500 and $ 30,000 for employees payables and trade payables. This is making of current liabilities of$ 33,500.

The balancing figure net of drawing of $ 57,00 make it to capital of $ 168,800 (202300-33500).

Factors providing positive sign to supplier of materials---

Reasonable rate of net profit to sales ratio of 13.98%.

Low amount of current liabilities (other than of supplier's liability) and no other long term finance provide belief of solvency.

High amount of capital investment by the owner makes supplier reliable that, owner will do everything to maintain business in better way.

Factors which shows sign of concern as a supplier---

Low cash ratio is concern as immediate cash will not be available.

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