Bakers Co started trading as a small chain of bakeries three years ago.
Owners of the business are considering applying for a loan to expand their current operations. However, financial statements of the company have not been prepared yet which are essential for obtaining a bank loan.
Bakers Co’s owners have hired you to prepare the first financial statements of Bakers Co for the year ended 31 December 2011.
You are required to calculate the Net Assets of Bakers Co at the START of the year (ie. 1st January 2011) for the purpose of presenting opening reserves in the Statement of Changes in Equity.
Following information is available relating to the last year:
- Net Assets as at 31 December 2011 are $100,000
- Bakers Co incurred expenses of $3,000 each month which were settled after a 2 month credit period.
- Bakers Co’s average sale for a month was $8000. All sales were made for cash.
- Bakers Co also paid rent of $2,500 every 3 months.
- Bakers Co purchased a piece of land for $20,000 during the year.
What were the Net Assets of Baker Co at the start of the year?
Solution
Net Assets of Bakers Co at 1st January 2011 were $50,000.
[100,000 + 36,000(3000 x 12) – 96,000(8000 x 12) + 10,000(2500 x 4)] = $50,000
As only closing net assets of Bakers Co are available, we need to work backwards to arrive at the opening net assets for the year 2011.
Therefore, expenses need to be added to the closing net assets to arrive at the net assets at the start of the period. Credit period for payment of expenses is irrelevant because expenses are recorded on accrual basis rather than cash basis. Similarly, sales need to be deducted from the closing net assets as they did not contribute to net assets at the start of the period.
The purchase of land does not affect the calculation of net assets as it does not result in an increase or decrease in Bakers Co’s net assets. If for example the land was purchased for cash, the transaction would have caused a decrease in cash and a corresponding increase in the fixed asset. The purchase of land therefore does not result in a change in the value of net assets but simply causes its composition to change which is why it must be ignored in the calculation above.