Question

Zepra Gifts has extracted the following information from its records, following the close of its books on 31^st December, 2018:

Account	RM
Wages Payable	960
Utilities expense	5,856
Cost of Sales	17,280
Dividends received	6,912
Interest received	1,200
Administrative Expenses	2,074
Interest expenses	691
Accumulated depreciation – Building	17,280
Depreciation expense, Building	3,456
Wages and salaries	10,368
Cash on hand	6,912
Inventories	11,750
Building	48,384
Sales	41,472
Accounts Payable	13,824
Capital	7,843
Loan (due in 5 years)	17,280

Required:

1. Prepare the relevant income statement and balance sheet, based on the information provided above, for Zepra Gifts.
2. Sandra, ZepraGift’s owner, mentions that she does not use the balance sheet to assess the performance of ZepraGift because this statement shows a snapshot of the business at a certain point in time and does not show the flow of business over time. She likens this situation to trying to understand a movie story based on just specific scenes released for promoting the product, which may not reflect the overall product. She asks for your opinion on this view. Discuss Sandra’s perspective. You may agree or disagree with her view, but you must justify your stance based on any one item shown on the balance sheet.

3. Start typing here

4. You are studying some annual reports of listed firms, and note that a particular firm has recorded positive net cash flows from operating activities for a certain year and negative net cash flows from operations the following year. Your classmate mentions that this indicates bad news and the firm is unlikely to survive over the long term, and it should cease operations before it loses more money. Consider an example where this view could be supported, as well as another example where this view may not hold, and discuss whether you agree with your classmate’s view.

5. Start typing here

   (11 + 5 + 5 = 21 marks)

Answer 1

(a)
Zepra Gifts
Income Statement for the year ended 31 December, 2018
Particulars	RM
Sales	41,472
Less: Cost of Sold	17,280
Gross Profit	24,192
Other Income : Dividend Income	6,912
: Interest Income	1,200
Less: Expenses
Wages & Salaries	10,368
Depreciation	3,456
Utilities expense	5,856
Administration Expenses	2,074
Interest expenses	691
Net Profit	9,859
Statement of Financial Position as on 31 December, 2018
Particulars	RM
Asset
Current Assets
Cash on hand	6,912
Inventories	11,750
Non Current Assets
Building	48,384
Accumulated Depreciation- Building	-17,280
Total	49,766
Liability & Capital
Current Liability
Accounts Payable	13,824
Wages Payable	960
Non Current Liability
Loan	17,280
Capital & Surplus (Equity)
Capital	7,843
P & L Appropriation	9,859
Total	49,766
(b) I disagree with the opinion of Sandra. Balance sheet and income statement is not only trailer but
give the full picture of financial position accumulated performance upto date. Capital and Surplus
(Equity ) one of the line item in Balance sheet speaks about ultimate growth of the firm. Total
capital & surplus of company is RM 17,702 (7,843 + 9,859). Capital represent total financed by owner
initially and during the period. Surplus represent accumulated profit or loss till date from start of
business. That is total capital and suplus cover 35.57 % (17,702/49,766). So it can say that Zepra Gift
internally finance by 35.57 %, which is quite good. So balance sheet and income statement gives
true picture of financial position and performance.
(d) Having a negative cash flow from operation indicates that you’re putting more money into the
business for long-term success of your company than you’re actually earning. Many time is happen
sales increased & receivable enhanced but amount stuck in working capital for long term growth
object. Lack of working capital management is one of the reason that operating activity got negative.
But it does not mean that firm is unlike to survive over the long term. So I am disagreed with classmate's
view.