6.4 Interested parties (3)
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1.
The following information relates to the finances of the 'Cambridge Debating Club' for the year ended 31st December 2023:
- Membership fees received: £350
- Printing costs for newsletters: £25
- Refreshments provided at meetings: £40
- A bank balance at 1st January 2023: £150
- A bank balance at 31st December 2023: £220
Required: Prepare a simple income statement for the Cambridge Debating Club for the year ended 31st December 2023.
Cambridge Debating Club
Income Statement
For the year ended 31st December 2023
| Income | Amount (£) |
| Membership Fees | 350 |
| Other Income | 0 |
| Expenses | Amount (£) |
| Printing Costs | 25 |
| Refreshments | 40 |
| Bank Charges | 0 |
Total Income: 350
Total Expenses: 65
Profit for the Year: 350 - 65 = £285
2.
Question 2: Describe the role of creditors and shareholders as other interested parties in a business. Explain how their interests might sometimes conflict with each other.
Creditors are individuals or organizations to whom a business owes money (e.g., banks, suppliers). Their primary interest is to ensure the business is financially stable and capable of repaying its debts. They want to see consistent profitability and positive cash flow. Creditors often require collateral or guarantees to mitigate their risk.
Shareholders are the owners of the business. Their primary interest is to maximize the return on their investment. They want to see the business grow and become more profitable, leading to an increase in the value of their shares and potentially dividend payments.
Potential Conflicts of Interest:
- Risk Aversion vs. Growth:** Creditors are generally risk-averse and prefer stability, while shareholders may be more willing to take risks for the potential of higher growth. This can lead to disagreements about investment decisions.
- Dividend Payments vs. Reinvestment:** Shareholders may want to receive regular dividend payments, while the business may prefer to reinvest profits for future growth. This can create tension between the two groups.
- Debt Levels:** High levels of debt, while potentially boosting short-term profits for creditors, can increase the risk of the business failing, which is detrimental to shareholders.
- Profit Distribution:** Disagreements can arise over how profits should be distributed – whether to creditors, shareholders, or reinvested in the business.
Effective communication and transparent financial reporting are essential to manage these potential conflicts of interest. A well-managed business will strive to balance the needs of all stakeholders to ensure long-term sustainability.
3.
Question 3: Below is a statement of capital for a partnership, ABC Partners, for the year ended 31st December 2023.
| Partner | Opening Capital (£) | Profit/Loss (£) | Closing Capital (£) |
| Alice | £20,000 | £5,000 | £25,000 |
| Bob | £15,000 | £2,000 | £17,000 |
a) Calculate the change in capital for each partner. (4 marks)
b) What does the statement of capital show about the financial performance of the partnership? (2 marks)
Answer 3:
a) Change in Capital Calculation:
- Alice: £25,000 (Closing Capital) - £20,000 (Opening Capital) = £5,000
- Bob: £17,000 (Closing Capital) - £15,000 (Opening Capital) = £2,000
b) Financial Performance of the Partnership: The statement of capital shows the changes in the partners' individual capital accounts during the year. An increase in capital indicates that the partner has benefited from the partnership's profits, while a decrease indicates that the partner has drawn money out of the business or suffered a loss. In this case, both partners experienced an increase in their capital, indicating that the partnership made a profit of £7,000 (£5,000 + £2,000).