Financial Analysis of the Creative Chips - Case Study Example

Creative Chips – Financial ments Presentation and Analysis [Supervisor Creative Chips – Financial Statements Presentation and Analysis Entries in T – Accounts of the financial information related to Creative Chips Salary Expenses Debit Credit Particulars Amount ($) Particulars Amount ($) Cash $ 89,850 Income Statement $ 89,850 $ 89,850 $ 89,850 Dividend Debit Credit Particulars Amount ($) Particulars Amount ($) Cash $ 5,000 Income Statement $ 5,000 $ 5,000 $ 5,000 Telephone Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 1,350 Income Statement $ 1,350 $ 1,350 $ 1,350 Rent Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 23,400 Income Statement $ 23,400 $ 23,400 $ 23,400 Delivery Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 5,750 Income Statement $ 5,750 $ 5,750 $ 5,750 Insurance Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 3,500 Income Statement $ 3,500 $ 3,500 $ 3,500 Repairs Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 4,400 Income Statement $ 4,400 $ 4,400 $ 4,400 Interest Expenses Debit Credit Particulars Amount ($) Particulars Amount ($) Bank $ 130 Income Statement $ 130 $ 130 $ 130 Raw Material Debit Credit Particulars Amount ($) Particulars Amount ($) Opening Balance $ 125 Bank $ 23,300 Closing Balance $ 23,425 $ 23,425 $ 23,425 Work In Process Debit Credit Particulars Amount ($) Particulars Amount ($) Opening Balance $ 125 Raw Material $ 50 Labour $ 320 Closing Balance $ 495 $ 495 $ 495 Finished Goods Debit Credit Particulars Amount ($) Particulars Amount ($) Opening Balance $ 125 Inventory $ 650 Closing Balance $ 775 $ 775 $ 775 Goods in Transit Debit Credit Particulars Amount ($) Particulars Amount ($) Opening Balance Bank $ 1250 Closing Balance $ 1,250 $ 1250 $ 1,250 Sales Debit Credit Particulars Amount ($) Particulars Amount ($) Income Statement $ 175,000 Cash $ 175,000 $ 175,000 $ 175,000 Cash Debit Credit Particulars Amount Particulars Amount Opening Balance $ 5,440 Salaries $ 89,850 Sales $ 175,000 Dividend Expenses $ 5,000 Telephone $ 1,350 Rent $ 23,400 Delivery $ 5,750 Raw Material $ 23,300 Insurance $ 3,500 Repairs $ 4,400 Interest Expenses $ 130 Goods in Transit $ 1,250 Closing Balance $ 22,510 $ 180,440 $ 180,440 Explanation of Entries for Wages The wages, i.e., the direct labor cost for the production of chips, amount to 3/4 of the remuneration given by Lesay to Nielson. This means that out of the total remuneration of $ 48,000 given to Nielson, $ 36,000 can be attributed to wages since 3/4 of his time working at creating chips is devoted to manufacturing chips at the company; the remaining amount, i.e., $ 12,000, is attributed to the compensation given to Lasey for overseeing administrative issues. Therefore, the amount of wages expenses for the financial year 2003 amounts to $ 36,000. Apart from this, as can be observed in the balance sheet of the company for the year 2002, there are wages which are yet to be paid by the company, which amount to $ 7,350. In addition to this information, it is also worth noting that the total expenditure incurred by the company in relation to payroll amounted to $ 89,850. Among the expenditure incurred in relation to payroll, $ 42,000 ($ 3,500 x 12) refers to salary of Lesay, therefore it is found that the amount which is related to the payment of wages is $ 89,850 - $ 42,000 - $ 12,000, i.e. $ 35,850. However, keeping in mind that there is an amount of wages payable therefore after accounting for the total payment made towards the salaries and wages expenses, there is still an amount of $ 7,500 left to be paid, and it is, therefore, recorded as wages payable in the balance sheet (Drury, 2007; Nikolai, Bazley, & Jones, 2009). Financial Statements The financial statements of Creative Chips for the financial year ending 31 December 2003 are presented as under, which contain Income Statement, Balance Sheet and Cash Flow Statement. Income Statement Creative Chips Income Statement for the year ended 31 December 2003 Particulars Amount ($) Sales 35*5,000 $ 175,000 Raw Material $ 23,335 Direct Labor $ 36,000 Transport $ 5,750 Cost of Goods Sold $ 65,085 Gross Profit $ 109,915 Salaries $ 54,000 Telephone Expenses $ 1,350 Rent Expenses $ 23,400 Insurance Expenses $ 3,500 Repairs $ 4,400 Interest $ 130 Depreciation Photocopier $ 150 Depreciation Machine $ 2,000 Dividend Expenses $ 5,000 Operating Expenses $ 93,930 Net Profit $ 15,985 (Nikolai, Bazley, & Jones, 2009) Balance Sheet Creative Chips Balance Sheet As at 31 December 2003 Particulars 2003 2002 Particulars 2003 2002 Cash $ 21,425 $ 5,440 13 % Bank Loan $ 1,000 $ 1,000 Inventory $ 1,110 $ 375 Wages Payable $ 7,500 $ 7,350 Office Photocopier $ 2,000 $ 2,000 Total Liabilities $ 8,500 $ 8,350 Less: Accumulated Amortization $ -450 $ -300 Production Machine $ 10,000 $ 10,000 Less: Accumulated Amortization $ -6,000 $ -4,000 Common Stock $ 5,000 $ 5,000 Net Patent $ 1,600 $ 1,600 Retained Earnings $ 15,985 $ 1,765 Total Assets $ 29,685 $ 15,115 Total Liabilities & Equity $ 29,485 $ 15,115 (Nikolai, Bazley, & Jones, 2009) Cash Flow Statement Creative Chips Cash Flow Statement for the year ended 31 December 2003 Particulars Amount ($) Cash flows from Operating Activities Cash received from revenue transactions 175,000 Cash paid for operating activities Cash paid for raw material 23,335 Cash paid for direct labor 36,000 Cash paid for transport 5,750 Cash paid for salaries 54,000 Cash paid for telephone expense 1,350 Cash paid for rent expenses 23,400 Cash paid for insurance expenses 3,500 Cash paid for repairs expenses 4,400 Depreciation charges machine 150 Depreciation charges photocopier 2,000 -153,885 Net Cash provided by operating activities 21,115 Cash flows from Financing Activities Cash received from financing activities - - Cash paid for financing activities Cash paid for interest charges -130 -130 Net Cash provided by financing activities -130 Cash flows from Investing Activities Cash received from Investing activities - - Cash paid for Investing activities Dividend Expenses -5000 -5,000 Net Cash provided by Investing activities -5,000 Increase in cash for the year 2003 15,985 Opening Balance for Cash 5,440 Closing Balance for Cash 21,425 (Nikolai, Bazley, & Jones, 2009) Analysis of the Company’s Operations and Financial Situation The company Creative Chips is involved in the business of manufacturing and selling chips. The overall financial information presented indicates that the company is performing satisfactorily in financial terms. The fact that company is utilizing its rented space in a way that it does not require additional space for manufacturing and storing its inventory stocks, is indicative of the efficient operations of the company. Apart from this, the gross profit amount as depicted in the income statement of the company is significant and can be regarded as highly favorable for the company. However, the operating expenses of the company are significantly high, which, as a result, have undermined the significance of the gross profit. The liquidity position of the company indicates that there are too much liquid assets held up by the company, which could have been invested for generating income from other sources (Webster, 2003; Nikolai, Bazley, & Jones, 2009). The company’s operational efficiency can be questioned on the basis of the fact that there is only one employee who runs the manufacturing operations of the company. On the other hand, there is no marketing department of personnel of the company which would prove to be helpful in sales promotion of the company (Nikolai, Bazley, & Jones, 2009). Moreover, there is only one shareholder of the company, i.e., the owner herself. This unity of ownership means that all risks are for the owner to bear. Recommendations to the Owner of Creative Chips On the basis of analysis presented in the above paragraphs, following are the recommendations given to the owner of Creative Chips: Considering the cash flow statement of the company, one can see that there are no inflows of cash for the company from investing or financing activities. Thus, the only cash generating source for the company is its manufacturing and selling operations. On the basis of these observations, it is recommended that the company shall invest its retained earnings or lend its finance to others so as to make sure that there are other sources of income also for the business. Apart from the owner herself, the company has employed only one employee, i.e., Nielson, for dealing with production and other administrative issues. This means that the business of the company which includes the manufacturing of the chips is largely dependent on one single person. If Neilson leaves the company, the whole manufacturing process of the company will be affected and until Lesay is able to find another suitable person for the job, the manufacturing and administrative issues will remain closed. In this regard, it is recommended that the owner of the business, i.e., Lesay, shall make appropriate arrangements to ensure that the business processes of the company are not solely dependent on one single person. There are no advertisement expenses of the company, which indicates that the company does not market its product. On the basis of this observation, it is recommended to the company that there shall be appropriate marketing of the product made by the company, which is expected to improve its sales in the future. Moreover, there is only one transporter of the company with which the company makes arrangement for the delivery of raw materials and for the delivery of finished products to the customers. On the basis of this observation, it can be stated that in case the transporter of the company is not available for the delivery of raw material, the manufacturing process may be hampered and, on the other hand, where the transporter is not available, the orders to be delivered to the customers may be delayed and therefore, the company may lose its valuable customers. Thus, it is recommended to the owner of the company that she shall also make arrangements with other transporters or shipping companies in order to minimize the risk of delays in deliveries of raw material to the company or products to the customers. Lastly, the ownership structure of the company is also worth noting. The business is owned by Lesay and there is no other shareholder who would share the risks associated with the business. On the basis of these observations, it is recommended that the owner shall introduce more shareholders so as to spread risk over more individuals rather than her alone. References Drury, C. (2007). Management and cost accounting. London: Cengage Learning EMEA. Nikolai, L. A., Bazley, J. D., & Jones, J. P. (2009). Intermediate accounting. Mason: CENGAGE Learning. Webster, W. H. (2003). Accounting for managers. McGraw-Hill Professional. Read More