1
Mary Smith commenced trading on 1 September 2009 as a distributor of the Straight Cut
garden lawnmower, a relatively new product which is now becoming increasingly popular.
Upon commencing trading, Mary Smith transferred £7,000 from her personal savings to open a
business bank account.
Mary Smith’s purchases and sales of the Straight Cut garden lawnmower during the three
months ended 30 November 2009 are as follows:
2009 Bought Sold
September 12 machines at £384 each –
October 8 machines at £450 each 4 machines at £560 each
November 16 machines at £489 each 20 machines at £680 each
Assume all purchases are made in the first half of the month and all sales are in the second half of
the month.
At the end of October 2009, Mary Smith decided to take one Straight Cut garden lawnmower
out of stock for cutting the lawn outside her showroom. It is estimated that this lawnmower will
be used in Mary Smith’s business for 8 years and have a nil estimated residual value. Mary Smith
wishes to use the straight line basis of depreciation.
Additional information:
1
Overhead expenses paid during the three months ended 30 November 2009 amounted to
£1,520.
2
There were no amounts prepaid on 30 November 2009, but sales commissions payable of 21/2%
of the gross profit on sales were accrued due on 30 November 2009.
3
Upon commencing trading, Mary Smith resigned a business appointment with a salary of
£15,000 per annum.
4
Mary Smith is able to obtain interest of 10% per annum on her personal savings.
5
One of the lawnmowers not sold on 30 November 2009 has been damaged in the showroom
and is to be repaired in December 2009 at a cost of £50 before being sold for an expected £400.
Note
: Ignore taxation.
Required:
(a) Prepare, in as much detail as possible, Mary Smith’s trading and profit and loss account for the
quarter ending 30 November 2009 using:
(i) the first in first out basis of stock valuation, and
(ii) the last in first out basis of stock valuation.
(b) Using the results in (a) (i) above, prepare a statement comparing Mary Smith’s income for the
quarter ended 30 November 2009 with that for the quarter ended 31 August 2009.
(c) Give one advantage and one disadvantage of each of the bases of stock valuations used in (a)
above.
(Association of Accounting Technicians)