Question

Construct a simple set of financial statements in the form of an opening balance sheet.

The next activity requires you to construct a set of financial statements. The best way to understand financial statements and be able to interpret them in a meaningful way is by knowing how the information contained in them is derived. This knowledge can only really be acquired by preparing such statements. That is the purpose of these activities.

First read the information below carefully.

Orchestra Supplies Business

A group of musicians have established a company selling medieval period musical instruments by mail order and appointed themselves company directors. The musicians have raised £750,000 of the capital required themselves and borrowed a further £500,000 in the form of a long-term bank loan. In order to establish the business, they have undertaken the following transactions.

• Bought premises for £850,000 (paid by cheque).
• Bought furniture and fittings for £100,000 (paid by cheque).
• Bought (on credit) stock of instruments for resale for £300,000.
• Bought a motor van for £20,000 (paid by cheque).

The remaining £280,000 of the total initial funds provided is deposited in the business’s bank account.

The directors are not sure of the effect of these various transactions on the new enterprise and would like to see some sort of analysis showing its financial situation. The bank providing the long-term loan also demands to see this information! You have been approached to help with this problem.

Task

Prepare an opening balance sheet showing the opening financial position of the organisation (use the horizontal format). Remember a balance sheet is really just a list of assets, liabilities and owners’ capital, which is the difference between total assets and total liabilities. For each of the transactions identified, you should determine the impact on the business’ assets, liabilities and owners’ capital.

Record your sheet and results in a document with the title: Balance Sheet for Orchestra Supplies Business.

If you have correctly drafted the balance sheet for the Orchestra Supplies Business, it will, of course, balance! The fact that it balances, however, is not a guarantee that it is correct, since compensating errors are possible where errors have been made that affect both sides of the balance sheet equally.

Answer 1