Accounting Concepts & Practices - Assignment Example

SALLY’S PET SERVICES BUSINESS CASE ANALYSIS By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Table of Contents Question 1………………………………………………………………………………………..4 Question 2...……………………………………………………………………………….……..4 Question 3……………………………………………………………………………………….7 Question 5…………………………………………………………………………………………8 Question 6………………………………………………………………………………………..11 Reference List…...……………………………………………………………………………….13 Question 1: Work out Capital Capital= Total Assets-Total Liabilities Total Assets Cash 20,000+ 1508 21508 Accounts receivable 15,000 Building 200,000 Office supplies 1620 Land 80,000 Total assets 318,128 Total Liabilities Accounts payable 15,000+6901 21, 901 Bank loan 250,000 Total liabilities 271901 Capital = 318 128-271,901= $ 46,227 Question 2 Dates Account Title Unadjusted Trial Balance Adjustments Adjusted Trial Balance Debit Credit Debit Credit Debit Credit Feb, 2 Feb. 4 Feb. 5 Feb 6 Feb 8 Feb 12 Feb 13 Feb 16 Feb 17 Feb 21 Feb 25 Feb 27 Feb 28 March 1 March 2 March 4 March 10 March 11 March 12 March 14 March 16 March 17 March 20 March 25 March 31 Cash (balance) Cash Capital Insurance pre. Cash (ins) Land: bal Additional Cash Building: bal. Additional Cash Office supplies Bal. Purchases (supplies) Accounts payables: Bal. Cash Earned Revenues Cash Accounts receivables Revenues Revenues Cash Cash Rent (hydro-bath) Cash Wages Electricity expenses Personal drawings Cash Interest expense Bank loan bal. Depreciation expense Insurance Revenues Cash Cash Revenues Unearned revenues Revenues Cash Electricity expense Cash Telephone expenses Cash Cash Office Supplies Purchases Wages Cash Cash Revenues Revenues Cash Depreciation expense Retained earnings 21,508 50,000 960 80,000 10,000 200,000 25,000 1,620 500 1,500 15,000 1,000 1,000 400 300 600 8,800 1,000 1,500 200 1000 300 400 300 600 500 100 11,000 50,000 960 10,000 25,000 21,901 200 1,500 2,000 1,000 1,000 400 600 250,000 960 1,000 1,500 1000 300 400 300 500 100 11,000 53,467 35,848 90,000 225,000 1,620 500 15,000 1,000 900 600 600 8,800 2,400 400 1,200 50,000 21,901 17,400 250,000 53,467 48,848 90,000 225,000 2,120 500 15,000 1,000 900 600 600 8,800 2,400 400 50,000 21,901 17,400 250,000 53,467 Totals 435,088 435,088 383,868 392,768 396,168 392,786 Question 3 Sally’s Pet Services Income Statement For the Period Ending February 28, 2015 $ $ Revenues 4,500 Less: Purchases (500) Gross profit 4,000 Less: Expenses Rent-hydro bath 1000 Wages 400 Electricity 300 Interest expense 8,800 (10,500) Net Loss (6,500) Analysis: As it can be seen from the above income statement, Sally’s business makes a significant loss of about $6,500 for the financial period ending February 28, 2015. The loss is significant enough and does not conform to her earlier expectations when she made investments to the venture. Thus, she should be worried about the ability of the venture to pay for future bills as and when they come due. The income statement indicates that the venture is not making enough revenues to offset the current expenses especially the interest expense, which stands way above the revenues by a greater extent. Unless the venture devise ways for which it can make substantial revenues then there is no way it can manage to offset possible future expenses and bills. Question 5 Sally’s Pet Services Income Statement For the Period between 1st February to 31st March 2015 $ $ Revenues 17,400 Less: Purchases (500) Gross profit 16,900 Less: Expenses Rent-hydro bath 1000 Wages 900 Electricity 600 Telephone expenses 400 Interest expense 8,800 (11,700) Net income 5,200 Sally’s Pet Services Statement of Changes in Equity For the Period 1st to 31 March 2015 Capital Retained Earnings Total Equity $ $ $ Balance as at 1st March 2015 50,000 52,667 102,667 Changes in Equity Income 5,200 _ Balance as at 31st March 50,000 47,467 102,667 Sally’s Pet Services Balance Sheet For the Period Ending 31st March 2015 $ Assets: Cash 48,848 Office supplies 2,120 Accounts receivables 15,000 Land 90,000 Building 225,000 Less: Depreciation 2,400 222,600 Total Assets 378,568 Liabilities & Equity Accounts payables 21,901 Bank loan 250,000 Capital 50,000 Less Drawings (600) 49,400 Reserves 3,800 Retained earnings 53,467 Total Liabilities & Equity 378,568 Question 6 What does the balance sheet indicate about her Business? i) Current ratio= current assets/current liabilities = 48,848+2,120+15,000/21,901 = 3.01:1 Analysis The business’s current ratio indicates that it is fairly positioned to meet its current obligations as and when they arise. The standard current ratio for any business venture is positioned at 2:1, meaning two assets for every liability held (Benninga & Oded, 1997). Sally’s Pet Services’ current indicate that it has more than assets for every single liability held hence postulating that it can effectively pay for its future obligations without fail. ii) Total Debt Ratio= Total Assets/ Total Liabilities = 378, 568/ 271,901, 1.4 Analysis: The ratio indicates that the venture has tried to strike a balance between the level of debt and equity financing for the period in operations. The ratio stipulates that for every debt funds held at the current period there are at least 1.4 amounts of assets to offset them. It is important the ratio is increased in order to position the venture at a slightly higher position level (Fisher, Heinkel & Zechner, 1989). Businesses should ensure that the ratio is high because then they will be guaranteed of control challenges as well as prevent a likely scenario where ownership is solely enjoyed by the suppliers of credit (Covas & Haan, 2006). Considering that Sally’s Pet Services does not post enough profits, it will be important for it to increase borrowings as a way of cutting future payment of interest expenses. Why has Her Profit/Loss Figure changed Over the Two Month Period? The venture’s profits have changed substantially over the two month period from a loss of $5,200 because of increased sales revenues. The company has been able to access a substantial volume of revenues through providing grooming services. It has increased because the business has been able to prevent possible increase in the level of expenses within these two periods. In fact, the decision to employ part time employees has cut down on wages expenses, which has a substantial effect on the level of revenues earned within the two month period (Green & Hollifield, 1999). Should She Also Prepare Cash Flow Statement? Yes. It is important that Sally’s business also prepares a cash flow statement despite it being a small business and not only focuses on income and balance sheet statements. Cash flow statements help to ascertain from where cash is generated given that cash resource is deemed to be crucial in maintaining a healthy business environment and operations. Preparation of the cash flow statement will provide the owner with a distinctive guideline to establish from where cash emanated from and where it was used up hence acts an important planning tool for a business long term successful operations (Fisher, Heinkel & Zechner, 1989). Some of other important benefits of preparing a cash flow include; first, ascertaining whether or not a business has enough cash reserves or if it is profitable or not. Such fast growing business like Sally’s Pet Services will often portray net income but will always have their immediate cash resources tied up in accounts receivable (Fisher, Heinkel & Zechner, 1989). Secondly, the statement will indicate whether she is taking too much money from operations (Graham, 2000). In fact, it is important that cash flow distribution does not exceed cash flow from a company’s operations. References List Benninga, S & Oded S, 1997, Corporate Finance: A Valuation Approach, McGraw-Hill, New York Covas, F & Haan, W, J. 2006. The Role of debt and equity finance over the business cycle, Bank of Canada Working Paper, Retrieved on May 21, 2014 from http://www.bankofcanada.ca/wp-content/uploads/2010/02/wp06-45.pdf Fisher, E, Heinkel, R & Zechner, J. 1989, Dynamic capital structure choice: Theory and tests, Journal of Finance, 44, 19–40 Graham, R, J.2000. How big are the tax benefits of debt? The Journal of Finance, vol.LV, no.5: pp 1901-1942. Green, R and Hollifield, B. 1999, The personal tax advantages of equity, Working Paper, Carnegie Mellon University. Read More