UNDERSTANDING THE BALANCE SHEET

Answer Sheet 15
Date 3/1/1989
Gordon Pepper obtains a long term bank loan of £8,000 which he will start to pay back in 3 years time.
He also borrows £2000 from his brother that he must repay in 3 months! All money is put in the bank.
Assets £ Liabilities £ £
Cash in bank 10,000 Bank loan 8,000 Current Assets 10,000
Family loan 2,000 Current Liabilities 2,000
Total Assets 10,000 Total Liabilities 10,000 Working Capital 8,000
Asset - something owned by the firm Current Asset - an asset in the form of cash or 'near cash' (eg. Stock)
Liability - money the firm owes to someone else Current Liability - a debt needing to be paid in the near
future. Working Capital - current assets minus current liabilities.

Date 4/1/1989 He uses £1,000 from the cash in the bank to buy printing equipment.
Assets £ Liabilities £ £
Cash in bank 9,000 Bank loan 8,000 Current Assets 9,000
Printing equip 1,000 Family loan 2,000 Current Liabilities 2,000
Total Assets 10,000 Total Liabilities 10,000 Working Capital 7,000
Current Ratio 4.50 : 1

Current Ratio - current assets divided by current liabilities. This is a measure of how easily the firm can pay
its short term debts. Firms look to have a current ratio of at least 2:1.

Date 5/1/1989 He gets stocks of paper and ink, worth £1,250 which he will pay for in 90 days
Assets £ Liabilities £ £
Cash in bank 9,000 Bank loan 8,000 Current Assets 10,250
Printing equip 1,000 Family loan 2,000 Current Liabilities 3,250
Stock 1,250 Creditors 1,250 Working Capital 7,000
Total Assets 11,250 Total Liabilities 11,250 Current Ratio 3.15 : 1
Acid Test Ratio 2.77 : 1

Creditor - someone to whom a firm owes money. £9,000 stays in the bank, since the stock is on credit.
Acid Test Ratio - current assets minus stock divided by current liabilities. This is a measure of how easily
the firm can pay its short term debts. Firms look to have an acid test ratio of at least 1:1.

Date 6/1/1989
His first job uses £750 of stock and pays £2,500, which goes into the bank. (Profit = £2,500 - £750)
Assets £ Liabilities £ £
Cash in bank 11,500 Bank loan 8,000 Current Assets 12,000
Printing equip 1,000 Family loan 2,000 Current Liabilities 3,250
Stock 500 Creditors 1,250 Working Capital 8,750
Profit 1,750 Current Ratio 3.69 : 1
Total Assets 13,000 Total Liabilities 13,000 Acid Test Ratio 3.54 : 1

Date 7/1/1989
Gordon pays his brother and his creditors in full from the cash in the bank.
Assets £ Liabilities £ £
Cash in bank 8,250 Bank loan 8,000 Current Assets 8,750
Printing equip 1,000 Family loan 0 Current Liabilities 0
Stock 500 Creditors 0 Working Capital 8,750
 Profit 1,750
Total Assets 9,750 Total Liabilities 9,750

Date 9/1/1989
Gordon takes £600 from the profit, as wages. He buys £3000 more stock on 90 days credit
He buys a van for £4500 cash
Fixed Assets £ Liabilities £ £
Printing equip 1,000 Bank loan 8,000 Current Assets 6,650
Van 4,500 Creditors 3,000 Current Liabilities 3,000
Current Assets Profit 1,150 Working Capital 3,650
Cash 3,150
Stock 3,500 Current Ratio 2.22 : 1
Total Assets 12,150 Total Liabilities 12,150 Acid Test Ratio 1.05 : 1
Fixed Asset - An asset (owned by the firm) such as a factory, a vehicle or a machine which are used in the
production process over a long period of time. Fixed assets are not intended to be sold for cash (they are not
liquid or current assets).

Date 10/1/1989
Gordon does a job using £400 of stock. He will be paid £4,000 in 8 weeks time
Fixed Assets £ Current Liabilities £ £
Printing equip 1,000 Creditors 3,000 Current Assets 10,250
Van 4,500 Current Liabilities 3,000
Current Assets Long term Liabilities Working Capital 7,250
Cash 3,150 Profit 4,750
Stock 3,100 Bank loan 8,000 Current Ratio 3.42 : 1
Debtors 4,000 Acid Test Ratio 2.38 : 1
Total Assets 15,750 Total Liabilities 15,750
Debtor - Someone who owes your firm money, such as a customer who has taken goods and will pay later.

Date 12/1/1989
He is paid in full for the above job, and spends £3750 in cash on new printing equipment
He pays off his creditors, but takes another £10000 worth of stock on credit
Fixed Assets £ Current Liabilities £ £
Printing equip 4,750 Creditors 10,000 Current Assets 13,500
Van 4,500 Current Liabilities 10,000
Current Assets Long term Liabilities Working Capital 3,500
Cash 400 Profit 4,750
Stock 13,100 Bank loan 8,000 Current Ratio 1.35 : 1
Debtors 0 Acid Test Ratio 0.04 : 1
Total Assets 22,750 Total Liabilities 22,750

Date 2/1/1990
Gordon becomes a private limited company and sells £150,000 of shares to his family
He puts the share capital into the bank
Fixed Assets £ Current Liabilities £ £
Printing equip 4,750 Creditors 10,000 Current Assets 163,500
Van 4,500 Current Liabilities 10,000
Current Assets Long term Liabilities Working Capital 153,500
 Cash 150,400 Profit 4,750
Stock 13,100 Bank loan 8,000 Current Ratio 16.35 : 1
Debtors 0 Share capital 150,000 Acid Test Ratio 15.04 : 1
Total Assets £172,750 Total Liabilities 172,750

Date 3/1/1990
Gordon uses cash to buy an office for £80,000. He pays his creditors half of what he owes.
His recent work has made him profits of £4000, £1000 of which he is still owed due to late payment
Of the £3000 paid to him, half has gone into the bank and half is kept at the office
Fixed Assets £ Current Liabilities £ £
Printing equip 4,750 Creditors 5,000 Current Assets 82,500
Van 4,500 Current Liabilities 5,000
Premises 80,000 Working Capital 77,500
Current Assets Long term Liabilities
Cash at firm 1,500 Profit 8,750 Current Ratio 16.50 : 1
Cash at bank 66,900 Bank loan 8,000 Acid Test Ratio 13.88 : 1
Stock 13,100 Share capital 150,000
Debtors 1,000
Total Assets 171,750 Total Liabilities 171,750

Use the data above to complete the Balance Sheet below (which is in a different format)
Pepper Publishing at 1st March 1990
Fixed Assets £
Capital Equipment 4,750 This way of presenting the
Vehicles 4,500 balance sheet has exactly the
same information as the one for
Premises 80,000
Pepper ltd above.
Total 89,250
Current Assets It balances because the net assets
Cash at firm 1,500 of the firm must belong to to the
Cash at bank 66,900 owners of the firm - in the form
Stock 13,100 of retained profit and the funds of
shareholders.
Debtors 1,000
Total 82,500 You should find that the figures
Deduct (a) and (b) below are equal
Current Liabilities from Current Assets
Creditors 5,000
Net Current Assets 77,500

Total Assets less Current Liabilities 166,750 Total assets = fixed assets + current assets
Deduct bank loan 8,000
Net Assets 158,750 (a)
Financed by:
Retained Profit 8,750
Shareholder Funds 150,000
Total 158,750 (b)