On 1 January, Bob Earl set up Earl’s Gyms Ltd to manufacture and sell children’s outdoor play gyms. He was an engineer by profession but he understood the importance of accounting information and kept his accounting records meticulously throughout the year. At the end of the year he prepared the following income statement for the year:
Although disappointed, Earl was not surprised. He knew that expenses were higher than sales because throughout the year, he had been unable to generate a cash surplus. Ills bank overdraft had blown out and his bank manager has asked him to present his financial statements for the year to the bank.
You are the bank’s accountant and the bank manager has asked you to:
1. Review the performance of Earl’s Gyms Ltd for the current year and make a recommendation as to whether Earl’s overdraft facility should be cancelled.
2. Prepare a report for Earl explaining the errors he made in his income statement.
To perform this analysis you will need to update Earl’s income statement. The Following information may be useful:
■ The factory occupies 80 per cent of the rented building. the sales area 15 per cent and the administration area 5 per cent.
■ All the company’s non-current assets are estimated to have a useful life of five years and no salvage value at the end of their life.
■ Earl spends 50 per cent of his time as factory manager and spends the remaining time equally on sales and general administration.
■ Electricity costs are consumed almost entirely by the factory.
■ At 31 December, the following inventories existed:
Work in process………………………48,000