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Net Profit (after deducting taxation): K 6,578,320

Increase in Equity: K 5,683,320 from the first question in case the info may be required

Question 4.

To make sure that you have calculated the correct amount for the increase in equity, you will now have to prove the figure by calculating the difference in the expected value of equity at the end of the year with the value of equity at the beginning of the year.

First, construct a balance sheet for the start of the years production.

Assets include a land value of K 18,000,000.

Depreciable assets have a value of K 1,700,000.

Cash on hand is K 2,500,000.

The only liability is a bank loan of K 2,500,000

Opening equity is the difference between total assets and liabilities

Next carry out a calculation of Net Cash Flow for the business.

Ignore depreciation because it is not a cash expense. It is only an allowance.

One of the cash costs will be an amount of K 250,000 that reduces the value of the opening liability.

Another item of cash is the amount of taxation that was paid.

Having calculated the expected net cash flow for the year, add the value of the opening cash of K 2,500,000 to obtain the closing amount of cash for the farm business as an asset at the end of the year.

Next construct an expected closing balance sheet for the business.

Over one year the value of the farm will be the same at K 18,000,000.

The closing value for depreciable assets will be the opening value minus the amount of depreciation during the year.

Liabilities will be less, too. The amount of the loan to the bank which was K 2,500,000 will be reduced by K 250,000 to K 2,250,000.

The expected closing equity is total assets minus the closing loan to the bank.

Check that the amount in the change in equity between closing and opening balance sheets is the same as that calculated in question 1.

Also, calculate the efficiency percentage and the gearing ratio for the business.

Finally, write a brief account about the expected health of the Bandas farming business.

(10 marks).

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