Professional Documents
Culture Documents
Ranjan, the promoter of Real Infinity, had sought your help for the preparation of the financial
statements on the basis of the information set out below. He had to also pay a tax of 25% on the
profit if it exceeds Rs 5,00,000.
1
Financial year comprises of the months from April through March.
machine life was guaranteed for ten years. Apart from being hygienic, the dishwasher was also more
water-efficient than manual hand washing.
Both Ranjan and Hemant had given up their lucrative jobs to invest in their business. Needless to say,
they were disappointed by the initial figures. Amongst others, their target audience was the corporate
offices and it is on them that they focused their marketing efforts. After engaging in talks with
several offices, Ranjan could manage to get orders from two offices in Greater Noida. The restaurant
would supply afternoon lunch for employees and the bill would be cleared in the subsequent month.
This supply started on first of the festive month October 2018 and the sales figure was worth Rs.
2,05,000 per month. The table sales also picked up from Diwali, the festival of lights, considered to
be new year for the Hindus. Diwali was celebrated with great pomp and show across the country
every year and the festivities were all the more glittery and elaborate in Delhi and surrounds. In fact,
the Diwali period was considered an auspicious one with many people opening their businesses
during this time. Given the large-scale celebrations, there was great demand for food, and India
Heritage too benefited from increased orders. From this point in time, the table sales per month went
up to Rs 1,20,000 on average for the remaining period of the financial year 2018-19.
Growing revenue demanded more working capital in the form of inventory and cash. Ranjan had to
raise an additional amount either through a revolver2 loan or from a private money lender. While
revolving credit was available at 14% per annum the private lenders could charge any interest rate
and sometimes this was as high as 60%. Even though financing through private lenders was costly,
many small entrepreneurs preferred to take this route as the money was available on call and there
were no transaction costs associated with the funding. Hence, both Ranjan and Hemant decided to
borrow Rs 1,00,000 from a local moneylender on January 01, 2019. The moneylender charged
interest at a rate of 18% per annum and the amount had to be paid at the end of every quarter. The
principal was to be repaid within a maximum of two years’ time.
Besides the initial start-up costs or investments, running a successful restaurant entailed dealing with
ongoing operating expenses. Restaurants have high overheads with most of the operating expenses
attributable to food and labor. The inventory replenishments costing Rs 8,00,000 were delivered
during the year out of which Rs 7,60,000 had to be paid by March 31, 2019. On an average, the
monthly expenses of Real Infinity included staff salary- Rs. 45,000; gas- Rs.9, 000; coal- Rs. 10,000;
telephone and DTH connection - Rs. 2,000; stationeries and packing materials - Rs. 4,000;
transportation- Rs 5,000 for the first three months of operation and Rs 15000 for the remaining
period; and electricity – Rs 10,000. Generally, the electricity bills and staff salaries were paid in the
month after their occurrence.
After completing a financial year, both the friends set down to analyze their data and check the
performance and health of their business. Ranjan was aware that they had been unable to pay the
money lender his interest and they themselves had been unable to draw their salaries given the
paucity of funds. On March 31, 2019, he found inventory of Rs 50,000 was available in the store and
they had a bank balance of Rs 50,000. Had they been in regular employment, both Ranjan and
Hemant would have been taking home Rs 60000 per month, the minimum salary for a junior
manager. Ranjan was also left wondering why the cash balance had gone down despite revenue
exceeding the expenses.
2
Revolver is an arrangement for a line of credit with financial institutions that allows the entity to withdraw, repay,
and again redraw the amount sanctioned at any point of time till the arrangement expires.