Maria Hernandez and Associates Worksheet - Assignment Example

INTRODUCTION The assignment consists of four questions related to a case of Maria Hernandez & Associates. Question and 2 ask you to prepare the financial reports of the business entity. Question 3 and 4 ask you to write a short essay about the status of the business. Marks will be awarded based on the accuracy and completeness of answers for each question. Please note that if an error is made in one question (say Question 1) and included in a subsequent question (Say Question 2), no additional penalties will occur. All questions must be attempted and completed on an individual basis. REQUIRED: Read the case of Maria Hernandez & Associates and answer the following questions. If you make any assumptions about a question, be sure that you state them clearly. The maximum length for a short essay in Question 3 and 4 is 300 words, respectively. Question 1 (11 Marks) Prepare an accounting worksheet for Maria Hernandez & Associates to demonstrate the operations for the two months ended 31 August 2004. Use the following hint and complete the worksheet attached. Hint: Use the straight-line method to record the two-month use of the equipment and software which was purchased at the end of June. Its expected residual value is $0 after three years. No record for depreciation expense is required for the additional equipment and software bought on 27 August. Question 2 (10 Marks) Using information in the worksheet above, prepare a balance sheet and an income statement for Maria Hernandez & Associates. Question 3 (Short Essay - 4 Marks) Had the company made a profit as Maria Hernandez believed? If so, how would you explain why the cash in the bank has declined? Should she be worried? Question 4 (Short Essay - 5 Marks) What are the possible risks associated with a decline in the cash level? What would you suggest for Maria Hernandez to manage those risks? Attachment: Accounting Worksheet for Maria Hernandez & Associates from 2 July to 31 August, 2004 Cash Office Supplies Equip &S/W Prepaid Rent Accounts receivable Rent expense Utility bills, Salaries and repairs Office supplies expense Loan Project revenue Accounts Payable Capital 2 Jul, 2004 $12,000 $5,000 $27,000 $6,000 $20,000 $30,000 Operations of two months 1. $40000 $7000 $47000 2. $(900) $900 (1700) $1700 3. $(3000) $3000 $(3000) $3000 $(3000) $3000 $(33000) $33000 4. $(5500) $11000 $5500 Balance $6600 $4200 $38000 $6000 $7000 $6000 $33000 $1700 $20,000 $47,000 $5,500 $30,000 Interest Exp Dep Exp Interest Payable Prov for dep 1. Interest Payment $200 $200 2. Dep exp $1500 $1500 104,200 104,200 Note: Please insert additional columns or rows as needed. If there is no change in a particular column or row, leave that space blank. Question 3 (Short Essay - 4 Marks) Had the company made a profit as Maria Hernandez believed? If so, how would you explain why the cash in the bank has declined? Should she be worried? As shown in the income statement, Maria Hernandez is making a profit of $4600. But the cash at bank declined by $5400 because of several reasons. Firstly, Maria has paid rent in advance for 2 months and this has reduced her cash flow for the current 2 months. Moreover, Maria has earned project revenue of $47000 but she hasn’t yet received the $7000 of that revenue which she will receive in the coming months. Furthermore, Maria has included her salary as expense in the accounts and due to this there is a decline in cash. This salary is considered as cash drawing from the business and hence reduces the cash flow of the company. The profit is based on the accrual concept and this is why depreciation and interest payable is deducted from the income but are not regarded as cash outflows. So due to this, although the business has been profitable, the levels of cash has declined. Although the cash flow has reduced, Maria should not worry until the cash flow goes into negative. Presently, Maria can make timely payments to its creditors ($5500) and she has to receive revenue of $7000 in the next month. Maria is also earning a profit of $4600 and this profit, if maintained, will generate a healthy cash flow for the business. Cash is tied up in equipment and software which is a positive sign as the business will expand and this will increase the profitability of the business in the future. As the business will grow, the expenses will spread out and revenues will increase which will result in a good cash inflow for the business. Currently, the business is in its initial stages and will take some time until there is high cash inflow for the business. It is difficult to run a business and be profitable without sufficient cash inflow. If the cash available to the business is low or if there is cash outflow from the business, it is very difficult for the business to meet its current obligations. Due to the decline in the levels of cash, business may not pay back to it’s creditors, and investing in stock and assets of the company becomes very difficult. Due to this, assets of the business decrease and hence profitability also falls and business faces losses. Furthermore, creditors will not provide the business with credit if there is constant outflow of cash from the business .Due to pertinent losses; business may have to close down. So, reduced levels of cash have a very negative impact on the performance of a business. In the long run, insufficient cash or negative operating cash flows can threaten the ability of the company to continue as a going concern. Maria should delay her payables and should collect her receivables as early as possible and this will increase the cash holdings that Maria has. She can collect her receivables faster if she offers her debtors discounts for making cash payments. Although giving discounts is an expense, it will encourage creditors to make payments faster and will help Maria in managing the cash flow of the business. Maria should not tie up all the cash in purchasing assets instead she should keep sufficient cash in hand so that she can repay her creditors on time. She may also manage the risks associated by increasing the revenue of the business and improve the cash flow of business. She should also inject capital in the business and can be used to expand the business by promoting the services offered by Maria. These steps if taken effectively, will help Maria manage her cash resources in an efficient manner. Maria Hernandez and associates Income Statement From 2 July to 31 August, 2004 Income Project Revenue 47000 Expenses Rent Expense 6000 Utility bills, salaries and repairs 33000 Loan Interest 200 Office supplies Expense 1700 Depreciation on equipment 1500 Net Income 4600 Maria Hernandez and associates Balance sheet for the year ended 31 Dec 2003 ASSETS Current 6600 Cash 7000 Accounting Receivable 6000 Prepaid rent 19600 Total Non-current 4200 Office supplies 38000 Equipment and software (1500) Less : Accumulated depreciation 60300 Total Assets Liabilities Current 5500 Accounts Payable 200 Interest Payable Non current 20000 Loan 25700 Total Liabilities 34600 Net Assets Equity 30000 Capital 4600 Profit 34600 Total Equity Read More