- You owe £40 K in Corporation Tax: This amount will be recorded under the liabilities section as it is an outstanding expense, which the company is liable to pay.
- There are £15K worth of FPGA in the stock room: Since stock/inventory is a current asset for every entity, it will be recorded in the asset side under current assets.
- Paid £20K to a supplier for ARM Boards that are yet to be delivered: Since the transaction is prepaid and the company is yet to receive the boards, it will be classified in the asset side under current assets.
- Company’s brand is worth £80K: The brand value of a company is always classified under fixed intangible assets.
- Fleet of Cars: Since cars are fixed assets, they will be classified on the assets side under Fixed Tangible Assets.
- Repairs worth £12K yet to be delivered on customer’s good: Since these accounts for outstanding repairs and also because the company is liable to provide them, it will be accounted on the liability side.
- An amount of £55K owed to the supplier: Since these are the liabilities owed by the company, they will be classified under the liabilities side.
- Bank Balance of £30K: Bank Balance is always classified as Current Asset.
- Likely out-of –court settlement with a former employee: Since the company expects that it will have to pay the amount for out-of-court settlement, the same will be classified as liabilities although best way will be to classify it under ‘’Contingent Liabilities’’.
- Portfolio of clients is worth £150K: Client’s portfolio will be classified under Fixed Intangible Assets.
- VAT worth £18K due to HMRC: Since the company owes tax amount to HMRC, this will be classified under Liabilities section.
- Interest owed mortgages: on Since an amount of £25K is owed by the company on its mortgage loans, this will be classified under the liabilities section.
- A customer has paid £35k up front for goods, which have not yet been delivered to him: Since this amount refers to unearned revenue, this will be classified under liabilities section of the Balance Sheet.
Basis of preparation of Profit and Loss Statement
Time Period:
We assume that this is the beginning year of the company and there is no carry-forward stock.
Revenue Recognition
Since the company manufactures its product on contract basis, it is advisable to follow the ‘percentage-of-completion’ method under which the revenue, expenses and profit are recognized as the work is performed not at the beginning of the project.
Cost of Sales
Since the company manufactures the good on its own and also on outsourcing basis(to avail the cost benefits), the cost of sales will comprise of both these costs combined(including other direct costs associated with production of goods)
Operating Expenses
These are the expenses that are not related to the production activity. Management of every company, whether small or big, has the responsibility of controlling these expenses else if left uncontrolled, they can erode the profit margins significantly. Below discussed are few likely operating expenses the company has to bear:
a)Salaries Expenses: Since the company has a well-qualified administrative staff, the salaries to be competitive and the same will be recorded under operating expenses.
b)Depreciation Expenses: In addition to salaries, the company will also record depreciation expense relating to computers installed and lab equipment. For the purpose of calculating depreciation expense, we assume a straight line depreciation method.
Non-Operating items
Assuming that the company had acquired debt financing, the income statement will also include interest expense to be paid on the loan proceeds and the same will be classified under non-operating items. In addition, we also assume that the company will receive interest income on investments made.
Tentative Profit and Loss Statement for the Company
Works Cited
Operating Expense. (n.d.). Retrieved November 20, 2014, from Investopedia: http://www.investopedia.com/terms/o/operating_expense.asp
Tulsian, P. (2002). Financial Statements. In P. Tulsian, Financial Accounting (pp. 10-46). New Delhi: Pearson Education.
