Alex MacDonald was saddened when he heard of the death of his uncle, but was sho

ID: 2398230 • Letter: A

Question

Alex MacDonald was saddened when he heard of the death of his uncle, but was shocked when he heard that he had inherited a 1,000 acre farm, Ullapool Pasture, located in the Scottish highlands. The ranch currently had a house, outbuildings for help, and a barn. The inheritance also included 500 head of sheep. When Alex arrived in Scotland to check on his inheritance, he found the buildings and ences in need of repair. The manager of the farm greete Alex with a handshake and the financial statements from the end of the most recent fiscal year, which was about three months ago. The accounting report included only a balance sheet and an income statement: Ullapool Pasture Balance Sheet December 31, 2015 Liabilities Assets Cash Equipment Buildings Accumulated depreciation (52,000 Total assets 2,000 Mortgage £200,000 100,000 84,000 Owner's equity Owner's share 34,000 £234,000abilities and equities S234,000 Ullapool Pasture Profit and Loss Statement for 2015 Sale of sheep Cost of supplies Manager's salary £50,000 (10,000) (15,000) (10,000) (20,000 £ (5,000 Interest on mortgage Net loss

Explanation / Answer

Particulars

Amount in pounds

Cash

2,000

Equipment

1,00,000

Buildings

1,84,000

Less:

Accumulated depreciation

(52,000)

Mortgage

(2,00,000)

Net Worth

34,000

Profit and Loss statement: The profit and loss statement shows the income earned and expenses incurred during the year by Ullapool Pasture. This statement helps to understand Ullapool Pasture’s ability to earn profit, increase revenue and balance the expenses. It showing a net loss of 5,000 pounds for year ended 2015, Alex needs to focus on expenses of the pasture and how to reduce them along with how to increase the revenue which is only 50000 pounds in the year.

3. If Alex wants to continue operating the pasture he should take stock count of number of sheep available to him at the year end. He should check how many sheep were sold during the year and how many were new born. He should compare total expenses incurred to raise all the sheep as well as to raise per head of sheep. This will help him to understand direct expenses incurred against income generated from sheep. He need to sell sheep to cover all the expenses incurred at the pasture to arrive at breakeven. Hence if maintaining more sheep is costing more than he should minimise the number of sheep to be raised because the expense required to raise these sheep will reduce the profit.