Question

Rafael Ron trades as Goal Company. He buys and sells professional soccer balls. For the April of 2017, the following details of his business are available:

• ·  Opening inventory of balls (on 1st April 2017): 150 pieces at total cost of £1,200
• ·  Purchased in April: 180 pieces of balls at £7.5 each
• ·  During April he sold 190 pieces for £17 each (£3,230 in total)

• ·  Closing stock is valued at £7.5 per piece
• ·  Rent for the storehouse is paid in advance: the fee is £420 for a quarter year.
• ·  His assistant, Amy, receives £200 a month; it is always paid on the second workday of

the following month.

• ·  Postage costs were £1500 in total for the whole year.
• ·  On 10th of May the Goal Company received the £800 invoice of the firm’s marketing

advisor in connection with services provided in April.

Show your step by step calculations and answer the following questions:

1. 5.1) Prepare an Income Statement for Rafael Ron’s business for the month of April 2017.
2. 5.2) Please create/give two hypothetical business transaction that can have effect on the profit of the company (try to match them to the profile of the company). Explain how the transactions will affect the revenues and expenses .

Answer 1

Income Statement for April ($)

Sales (190×17)		3,230
Cost of Goods Sold
Opening Stock (150)	1,200
Purchases (180*7.50)	1,350
Less: Closing Stock (150+180-190)×7.5	(1,050)	1,500
Gross Profit		1,730
Less: Operating expenses
Rent (420*1/3)	140
Assistant's salary	200
Postage (1500*1/12)	125
Marketing advisory fees	800	1265
Operating Income		465

Two hypothetical transactions would be:

• Interest on business loan outstanding: The interest on the loan for the given period will be computed and charged against the revenue generated in that period under the matching concept. It matters if the interest is accrued for the period and does not whether or not actually paid.
• Insurance: Prepaid isurance paid will be initially recognized as asset. Then the same will be recognized as expense for the period expired. Hence the benefit of insurance will be apportioned as expense periodically to match the benefits derived as per the matching principle.