Case Number 1: Charlie Brown and the Eat-a-Bite Café
Charlie Brown feels very depressed. He has been in business, on his own, for just one month, running the Eat-A-Bite Cafe. His father purchased a piece of land alongside the main road into town for £95,000, on a 19-year lease, and has spent an additional £19,000 on constructing the pop-up cafe. In return, his father wants the satisfaction of knowing that his son is set up in life.
Charlie was pleased with his choice when he appointed Boo Boo as chef, and Nala and Saksoora as waitresses. Business has been great from the start, but now he and his father have prepared a set of accounts for the first month’s operations and it looks as though the cafe is operating at a loss. Neither of the men know much about accounting, and they have prepared the statements set out below using an old bookkeeping textbook, which they found online.
What is upsetting Charlie even more is that he is hoping to get married at the end of the year, but has agreed with his fiancée that this will not be possible if the business is struggling. He also knows that his father has given up a 10% return on investments he cashed in to provide funds for the business, and this very morning the bank manager has asked him to go to the bank to discuss his overdraft. He has decided to talk things over with his future father-in-law, with a view to possibly taking a job with his company as a truck driver where he knows he can earn
£400 per week, plus overtime.
Before this, however, he has come to discuss his problems with you and brought with him the attached financial information.
Required:
- Prepare a revised set of financial statements in good
- With reference to 1 above and any relevant further calculations, prepare a 1500 word report with your recommendations to Charlie.
THE ‘EAT-A-BITE’ Cafe
Income and Expense Summary for the month ended August 31
$ $
Income
Sales Food 14,206
Drink 9,020
23,226
Expenses
Purchases Food 15,260
Drink 10,000
Cleaning Materials 445
Kitchen Utensils and Appliances 1,200
Linen, cutlery, china and glass ‘tableware’ 1,800
Chef’s salary 1,800
| Wait staff wages | 1,400 | |
| Social Security, Insurance, etc | 320 | |
| Stationary, printing and advertising | 175 | |
| Postage and telephone | 100 | |
| Electricity | 171 | |
| Gas | 108 | |
| Other expenses | 32 | |
| Cash withdrawn by Charlie | 2,600 |
35,411 |
| Net Loss | ($12,185) | |
|
Assets Cash |
150 |
|
| Stock of food | 6,080 | |
| Stock of drinks | 6,500 | |
| Cleaning materials | 225 | |
| Tableware (expected to last 2 years) | 1,800 | |
| Kitchen utensils (they will also last 2 years) | 1,200 | |
| Menus and brochures | 145 | |
| $16,100 | ||
| Liabilities Bank Overdraft | 3,500 | |
| Food and Drink bills due (included in 25,260 above) | 8,835
$12,335 |
Case Study Number 2: Infinity Challenge
Infinity Challenge was taken over by its present three directors just over a year ago. They met to decide upon their accounting policies but there are various areas over which there is some disagreement. As part of your interview for the role of Chief Financial Officer, you’ve been asked to assess their different proposals below.
| Item | Amount
£ |
Admin Director | Marketing Director | Technical Director |
| Advertising | 18,000 | Expense full amount | Defer £8,000 to next year | No opinion |
| Stationery and supplies | 6,700 | Expense full amount | Carry £1,800 of stock to next year | No opinion |
| Research and Development Costs | 224,000 | Expense full amount | Expense over 5 years | Carry as asset on Balance
Sheet |
| Provision/Allowance for Bad and Doubtful Debts | to be decided | Provision against specific accounts receivable (£30,100) | General provision of 10% of total receivables (£96,200) | Make no provision |
| Land and Buildings | 570,000
historic cost |
Leave at cost | Include at market value £2,000,000 | Include at market value
£2,000,000 and depreciate over 50 years |
| Equipment and Machinery | 180,000
historic cost |
Depreciate over 5 years | Depreciate over 10 years | Depreciate over 6 years |
| Company stamp | 150 | Expense full
amount |
Depreciate over
10 years |
No opinion |
Required: Prepare a report for the CEO of 1500 words maximum. Your report should include:
- Assessment of the impact of each of the 3 proposals on both the company’s profit for the year and its Balance Sheet.
- Comment on the suitability of the proposals, bearing in mind relevant accounting principles and assumptions as well as any other non-financial considerations.
- Note what, if any additional information you require and any circumstances under which your recommendations might change.
