Read the information in Table 1 about Northfield Cycles, a small business repairing and selling electric bicycles. The owner has prepared a simplified state...
Question 1 Report
Read the information in Table 1 about Northfield Cycles, a small business repairing and selling electric bicycles. The owner has prepared a simplified statement of financial position at 30 June. She is meeting her bank to discuss a loan for a new repair bay. All values are shown in $.
| Item | Value ($) |
|---|---|
| Workshop equipment | 32,000 |
| Inventory of bicycles and parts | 14,500 |
| Cash at bank | 3,500 |
| Trade payables | 8,000 |
| Bank loan | 20,000 |
The business had sales of $96,000 during the year. The owner wants to use the financial account to show the bank what the business owns and what it owes. The loan manager is particularly interested in the value left for the owner after liabilities are paid.
(a) Define the term liability. [2]
(b) Calculate the total assets of Northfield Cycles at 30 June. [4]
(c) Analyse how the statement of financial position could help the bank decide whether to lend to Northfield Cycles. [8]
Answer Details
(a) A liability is an amount owed by a business to another person or organisation. [2 marks]
(b) Total assets include everything the business owns or controls with value:
\[\$32,000+\$14,500+\$3,500=\$50,000\]
Northfield Cycles has total assets of $50,000. [4 marks]
(c) The statement of financial position helps the bank because it identifies the assets owned by the business, totalling $50,000. It also identifies liabilities: trade payables of $8,000 and a bank loan of $20,000.
\[\text{Total liabilities}=\$8,000+\$20,000=\$28,000\]
\[\text{Net assets}=\$50,000-\$28,000=\$22,000\]
The $22,000 net assets suggest that some value would remain for the owner after the stated liabilities were paid. The bank can use this information to assess the business's existing debt and possible security for lending. However, a statement of financial position is a snapshot at one date. It does not show whether bicycles are selling now or whether future cash receipts will be enough to make loan repayments. The bank should also consider sales, profit and cash-flow forecasts. [8 marks]
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