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A business’s bank balance increased by $750,000 during its last financial year. During the same period it issued shares of $1 million and repaid a loan note of $750,000. It purchased non-current assets for $200,000 and charged depreciation of $100,000. Working capital (other than the bank balance) increased by $575,000.
What was its profit for the year?
This question is a bit confusing!! so anyone could tell me the simpler way to calculate this or how to apply it to equation?
the correct answer given is $1,175,000Bank increases by $750
Other net current assets increase by $575
Noncurrent assets increase by $100Total increase in noncurrent and net current assets $1,425
Share capital increases by $ 1,000
Loan note decreases by $ (750)
Excluding profit or loss for the year, net increase in equity and loans $250Profit for the year is difference between 1,425 and 250 = 1,175.
I don’t understand. How bank balance increase can be connected with profit for the year? It may have no connection with profits -maybe our past customers have paid their payments, or maybe it is payment in advance from future customers..
Why net increase 1,175 is called profit?This question required understanding of the accounting equation as follows:
assets = liabilities + equity
=> noncurrent assets (NCA) + current assets (CA) = noncurrent liabilities (NCL) +current liabilities + share capital (SC) + retained earnings (RE)
=> NCA + bank + other CA = NCL + CL + SC + RE
=> NCA + bank +(other CA – CL) = NCL + SC + RE
=> NCA + bank + other net current assets = NCL + SC + RE
The accounting equation applies at all times so if there are movements in assets, there must be corresponding movements in equity and/or liabilities. The question provides sufficient information about movements in all items in the equation except for the movement in retained earnings (which of course would correspond to the profit or loss for the year)
Plugging in the numbers:
100 + 750 + 575 = -750 + 1,000 + RE
Solving the equation for the movement in RE (profit for the year) gives a result of 1,175.
In summary, the movement in the bank account must be considered with all other known movements in assets, liabilities and equity to figure out the bit of information that was not provided in the question, i.e. the profit for the year. Knowledge and understanding of the accounting equation would enable you to figure out the profit for the year.
Thank for your answer, could you explain to me why did you write negative 750. For my thinking, “LOAN NOTE” is a liability but it is “REPAID A LOAN NOTE” so we write negative 750. Or all of liabilities we also write NEGATIVE.
You are right my friend
Let me explain ;
Profit = Income – Expenses
Capital = Asset – LiabilitiesAs Capital = Turnover ( concrete cash = cash without goodwill because assets are depreciated )
Turnover = Shares valued
As from the equation
Capital = Asset – Liabilities
So,
Capital is Share valued
Asset is initial share valued without year end profit
Liabilities is profit for the year ( negative because it is owed to shareholders )
Then finally,
Share valued = Initial Share Value –
(-Year end profit)
Share valued = Initial Share Value +
Liable ProfitThank You
Let me explain
The last financial year at year end means the year end profit
As in the case some will not believe me
Financial Year is calculated ;
15 Aug c/f 2023 to 16 Aug b/f 2023
Ask lecturers if you don’t understand.It must be called instead previous year end profit
Thank You
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