Q2.

Prepare financial statements (Balance Sheet, Income State & Cash flow statement-
Receipts and payments) for three years.
Ans:

Income Statement
Particulars Year 1 Year 2 Year 3
Revenue 219000 8760000 13140000
Less: COGS 43800 1752000 2628000
Less: Loss on Underreporting 32850 1314000 1971000
GROSS PROFIT 142350 5694000 8541000
LESS: OPERATING COSTS
Technician's Wages 3600 120000 180000
Local Management Salaries 120000 325000 400000
Sales Staff Salaries 18000 18000
Water Testing & Filter
Maintenance 10200 408000 612000
Marketing Expenses 60000 75000 171400
Vehicle Expenses 2500 65000 110000
Other Costs 47800 1756000 2632000
Depreciation 5333.5 136340 200510
TOTAL OPERATING COSTS 249433.5 2903340 4323910
OPERATING PROFIT -107083.5 2790660 4217090
Interest Charge 100000
PROFIT BEFORE TAX -107083.5 2690660 4217090

Balance Sheet
Particulars Year 1 Year 2 Year 3
I. EQUITY AND LIABILITIES
Capital 200000 200000 200000
-
107083. 2583576.
Retained Earnings 5 5 6800666.5
2783576.
TOTAL LIABILITIES 92916.5 5 7000666.5
II. ASSETS
Slow-sand Filters 20000 507500 757500
Motorcycles and Trucks 20000 512500 750000
Total 40000 1020000 1507500
Less: Accumulated depreciation 5333.5 141673.5 342183.5
Net Fixed Assets 34666.5 878326.5 1165316.5
Investment in Blue Future 36000 32000 28000
Cash 22250 1873250 5807350
2783576.
TOTAL ASSETS 92916.5 5 7000666.5
 Cashflow Statement
Particulars Year 1 Year 2 Year 3
-
Operating Profit 107083.5 2790660 4217090
Add back: Depreciation 5333.5 136340 200510
Add expense: Expense in Blue
Future 4000 4000 4000
CASH FROM OPERATIONS -97750 2931000 4421600
Debt raised 1000000
-
Debt repaid 1000000
Interest on debt paid -100000
CASH FROM FINANCING 0 -100000 0
Investment in fixed assets 40000 980000 487500
Investment in current assets
Investment in Blue future 40000
CASH FROM INVESTMENT 80000 980000 487500
NET INCREASE/DECREASE IN
CASH -177750 1851000 3934100
Opening balance of cash 200000 22250 1873250
CLOSING BALANCE OF CASH 22250 1873250 5807350

Calculation of Depreciation
Capital Investment Year 1 Year 2 Year 3
Sand filter 1333.33 33833.33 50500
Motorcycle 1500 50000 75000
Truck 2500 52500 75000
TOTAL 5333.33 136333.33 200500

Calculation of Revenue
Particulars Year 1 Year 2 Year 3
Number of vendors 50 2000 3000
Customers per vendor 150 150 150
Water rate per litre 0.08 0.08 0.08
Number of working days 365 365 365
Revenue 219000 8760000 13140000

Calculation of Other Costs

Particulars Year 1 Year 2 Year 3
Payment to Politicians and Officials 43800 1752000 2628000
 Expenses in Blue Future 4000 4000 4000
Total 47800 1756000 2632000

Calculation of Testing and Maintenance Cost

Particulars Year 1 Year 2 Year 3
Water Testing Cost 5200 208000 312000
Maintenance Fee 5000 200000 300000
Total 10200 408000 612000

Calculation of Marketing Expenses

Particulars Year 1 Year 2 Year 3
Marketing Cost 10000 25000 40000
Brand Ambassador Contract Fee 50000 50000 131400
Total 60000 75000 171400

Q3. Clearly, mention explanations about the key accounting concepts that you have
used in the case.
Ans: The accounting concepts that we have used to solve the case are as follows-
 Going concern concept: According to this concept, business will continue to run for
an indefinitely long period. In this case we have capitalized the one-time fee of
$40000 in 10 years and claimed expenses of $4000 each year.
 Conservatism concept: According to this concept, we should anticipate no profit but
provide for all possible losses. In this case we have taken the number of customers to
be 150 and not 300.
 Dual aspect concept: According to this concept, the assets of the firm are always equal
to its liabilities and equities.
 Cost concept: According to this concept, assets are recorded at their cost and
depreciation is charged based on the original cost. In this case we have depreciated the
assets by using their asset life mentioned.
 Accrual concept: According to this concept, revenues are recognized when sales are
made or services rendered, irrespective of when cash is received. In this case we have
calculated revenues for projected three years without knowing whether cash will be
received or not.
 Matching concept: According to this concept, expenses incurred in generating
revenues are matched against them. In this case we have also used this concept while
preparing the income statement.
 Consistency concept: According to this concept, the methods of accounting should be
consistent for every year. In this case also we have prepared financial statements for
three years keeping similar approach.