Statement to compute net profit
WELCOME BACK. We will be focusing of the computation of net profit this week. Net profit, also known as net income, is the amount of money a business has left after all expenses have been subtracted from revenue. The net profit is a key indicator of the success or failure of the business operation during a specific period of time.
It is important that you remember the following formulas:
TO FIND NET PROFIT
■ Capital at end = Capital at beginning + Net profit – Drawings
■ Capital at end – Capital at beginning + Drawings = Net profit
TO FIND CAPITAL
■ Capital at end = Assets at end – Liabilities at end
■ Capital at beginning = Assets at beginning – Liabilities at beginning
WORKED EXAMPLE QUESTION 1
On January 1, 2018, Mary’s financial position was:
There were no long-term liabilities.
During the year of 2018, she bought fixed assets for $11500 and borrowed $1,000, repayable in 2023.
At the end of the year, her current assets were $10,750 and current liabilities were $6,650.
She had taken drawings of $6,000 during 2018, and her fixed assets had depreciated by $1,650.
You are required to: a. Draw up a statement, which may be in balance sheet form, to show the net profit for 2018. b. Calculate as at December 31, 2018, for Mary: i. Working capital ii. Capital owned iii. Capital employed c. You are told that the current assets and the current liabilities at the year end are:
Explain what these figures tell you about Mary’s financial position December 31, 2018.
SOLUTION QUESTION 1
Reasoning:
1. $1,000 is long-term liability.
2. The formula:
■ Capital at end = Capital at beginning + Net prof – Drawings
Capital = Assets – liabilities
WORKINGS:
c. The figures indicate that the working capital is $4,100, which means the short-term liquid assets are able to cover the short-term liabilities. The liquid asset cash is very low, which indicates there is a high probability that there will be difficulties paying her debts. The day-to-day operating expenses will incur more debts for her in the form of accrued expenses.
Visit again next week for a presentation on Suspense Account.
This is all we have time for this week. Always bear in mind, you must get up each morning with renewed determination, if you want to go to bed with full satisfaction. Never let what you cannot do stand in the way of what you can.