Joe’s Pizza (JP) was started by Ian Lefkowitz in the year 2000. It is a private limited company and has currently 5 locations in the US. It is famous for its cheesy and top-quality pizza and is one of the top pizzerias in the US. The restaurant wants to expand and grow organically. In the past, the company faced allegations and lawsuits due to poor hygiene. Hence, the company wants to improve its corporate image by using popular CSR strategies and wants to spread the PR message that their kitchens are now safe and that all the required sanitation is done regularly.
Joe’s Pizza recently hired a new accountant to manage and project their financial statements. While preparing the records, the accountant had forgotten to include depreciation of the Joe’s fixed assets. The value of the fixed assets was $250000 when they were purchased. The accountant then calculated on the basis of a five-year life for the assets and estimated a scrap value of $75000.
Financial information for Joe’s Pizza Ltd for the years 2019 and 2020
| 2019 $ | 2020 $ | |
| Sales Revenue | 500000 | 600 000 |
| Cost of Goods Sold | 150000 | 230 000 |
| Non- operating incomes | 70000 | 90000 |
| Expenses | 100000 | 150 000 |
| Interest | 10000 | 12000 |
| Tax | 35000 | 45000 |
Questions:
- Accountant has forgotten to include provision for depreciation in annual accounts. Explain two impacts of this on financial statements of JP [2 marks]
- Using the relevant figures from the stimulus, calculate the annual amount of depreciation. Show all your workings [2 marks]
- Using your answer (b) and information given in the table 1, prepare profit and loss account for both the years and calculate profit after interest and tax (PAIT) [6 marks]
