Can anyone explain where the figure of £2500 under "direct expenses" comes from in the solution to the first part of qu 16 in assignment X3? Also, they've added the sales figure of £4000 to the "cash" balance when only half of the sales figure was for cash and the other half was on credit. I would have thought we needed to add to £2000 to the trade receivables figure? Or is this an application of the realisation principle?
1)I think the direct expenses could be 2,500 as it would be the sum of the cost of sales plus salaries. As it is a manufacturing firm, I guess the salaries counts as a direct expense as they will be related to production. The rent and rates are probably more overheads instead of direct expenses. 2)No I don't think we're using the realisation principle here. I think that you're right that 2,000 should be added onto the trade receivables, but at the end of the year, there is actually a 100 decrease in the trade receivables. So the company receives that 2,000 in credit during the year, adds it onto the trade receivables, but we know at the end of the year, the trade receivables should be 600, so somebody must have paid them 2,000 + 100. Total cash received = 2000+2000+100. Does that seem right?
Pretty much 1) The direct expenses are 1,300 + 500 + 200 (ie include both the direct "cost of sales" type and the indirect "gross expenses" type from the income statement). 2) Yes - knowing that half of 2006 sales were on credit terms isn't useful/complete on its own, as we don't know about the payments made during 2006 in respect of goods bought in credit in 2005. So, we use the change in receivables figure of 100 to tell us the net effect of "2005 purchases on credit paid for in 2006" and "2006 purchases on credit not yet paid for" to give a figure of 4,000 + 100. The fact that half of sales are on credit terms can be used in part (ii) to help in the ratios. Hope this helps to clarify things
