The alternative to the SBA

Roxanne Wright, Contributor

There are those students who are not allowed to do the SBA and so will be required to
do a 11/2-hour examination. This exam comprises a case study and below we are
presenting a worked example. We recommend that even if you are not sitting this(paper
03/2) exam, you pay attention to the principles applied.

Worked example

Case study

Tim Thompson inherited a small restaurant - Eat Out - along with a sum of money from
his grandmother June Simmons. On January 1, 2006, he invested some of his savings to
expand the operations of the restaurant.

The assets of the business as at January 1, 2006:

$
Stoves 3,000
Tables 1,700
Chairs 1,440
Pots and pans 950
Refrigerator 5,000
Freezer 2,400
Cutlery 1,200
Cash at bank 11,000
Cash in hand 2,800

Part A

1. What type of business entity is Tim Thompson about to operate?

2. List TWO features of this type of business entity.

3. Determine the opening capital of this business.

4. Prepare Tim Thompson's opening journal entry.

5. What is the value of his current assets?

Part B

The following transactions took place during the first two weeks of January:

2006 $
Jan 6 Bought chicken and lamb 7,500
7 Bought rice 3,800
Withdrew $4,000 for business 8
 Bought pasta products 1,560
9 Sold 20 lunches at $36 each for cash
11 Purchased peas 300
Purchased seasonings 350
Purchased drinks 2,400
Purchased vegetables 1,200
12 Returned unsuitable vegetables 120
14 Obtained a loan from Small Business
Credit Union, received a cheque 10,000

All payments which were less than $400 were paid in cash.

6. Prepare and balance the two-column cash book for the first two weeks of January.

Part C

At the end of the month, it was observed that the business had incurred the following
expenses:

$
Electricity 2,480
Cooking gas 2,360
Wages 5,440
Transportation 350
Telephone 90

The business also bought a new food processor from Appliances Ltd. for $2,400.
Revenue earned from sales for the period was $40,000. The value of closing stock was
$1,300.

7. Name TWO other items of expense which Tim Thompson may have incurred.

8. Prepare the trading and profit and loss account for the period ended January 31,
2006.

9. Tim Thompson experienced a high level of spoilage of vegetables during the first
month of operation. State TWO ways this problem can be avoided in the future.

10. List TWO ways by which Tim Thompson could have increased sales.

Solution

1. Sole Trader/sole proprietor.

2. a. Owned and operated by the same person.

b. Capital invested by one person.

c. All of the profits go to one person.

 d. All the risks are borne by one person.

Assets less liabilities = Capital

$ $ $
29 490 - 0 = 29 490

3.

Journal
$ $
Stoves 3,000
Tables 1,700
Chairs 1,440
Pots and pans 950
Refrigerator 5,000
Freezer 2,400
Cutlery 1,200
Cash at bank 11,000
Cash in hand 2,800
Capital 29 490

Opening entries to start business on January 1, 2006

4.
5.

$
Current assets: Cash at Bank 11 000
Cash in hand 2 800
13 800

Cash Book

2006 Cash Bank 2006 Cash Bank

$ $ $ $
Jan 1 Balances 2 800 11 000 Jan 6 Purchases 7 500
7 Bank C 4 000 Purchases 3 800
9 Sales 720 7 Cash C 4 000
14 Loan 10 000 8 Purchases 1 560
11 Purchases 300
Purchases 350
Purchases 2 400
 Purchases 1 200
14 Bal c/d 6 870 540
7 520 21 000 7 520 21 000
15 Bal b/d 6 870 540

6.

7. Water, advertising, taxes among others.

8.

Tim Thompson
Trading and profit and Loss Account for month ended January 31, 2006
Sales 40 000
Less Cost of Goods Sold:
Purchases 17 110
Less Returns Outwards 120
Cost of Goods Available for Sale (COGAFS) 16 990
Less Closing Stock 1 300 15 690
Gross Profit 24 310
Less Expenses
Electricity owing 2 480
Cooking gas 2 360
Wages 5 440
Transportation 350
Telephone 90 10 720
Net Profit 13 590

9.
a) buy small quantities
b) better storage
c) change the supplied
d) change the variety of vegetables

10.
a) promotions
b) advertising
c) reduction in priced
d) change of menu