Problem
Shabangu Company was organised 15 months ago as a management consulting company. At that time, the owners invested a total of R50 000 cash in exchange for shares. Shabangu purchased equipment for R35 000 cash and supplies to be used in the business.
The equipment is expected to last seven years with no salvage value. Supplies are purchased on account and paid for in the month after the purchase. Shabangu normally has about R1 000 of supplies on hand.
Its client base has increased so dramatically that the CFO has approached an investor to provide additional cash for expansion.
The Statement of Financial Position and Statement of Comprehensive Income for the first year of business are as follows:
|
Assets
|
Liabilities and Equity
|
|
Cash
|
R10 100
|
Accounts payable
|
R2 300
|
|
Accounts receivable
|
R1 200
|
Share capital
|
R50 000
|
|
Supplies
|
R16 500
|
Accumulated profit
|
R10 500
|
|
Equipment
|
R35 000
|
|
Total
|
R62 800
|
Total
|
R62 800
|
Shabangu Company
Statement of Comprehensive Income
For the year ending 31 December 2015
Revenue R82 500
Wages and salaries R60 000
Utilities R12 000
Net income R10 500
Required: The investor has asked you to look at these financial statements and give an opinion about Shabangu's future profitability.
Are the statements prepared in accordance with IFRS/GAAP principles? Why/why not?
Prepare an adjusted set of financial statements if necessary.
Based on these two statements, what would you advise the investor?
What additional information do you need to give an educated opinion?