Analysis of Crosbys Cutters Business - Assignment Example

EYNESBURY INSTITUTE OF BUSINESS AND TECHNOLOGY ASSIGNMENT COVER SHEET Course Name: ___________________________________ Course Code: ___________________________________ Lecturer’s Name: ___________________________________ Assignment No/Title: _____________________________Due Date: ____________ Student Name: Student ID Date 1._______________________________________________ ________________ ______________ 2._______________________________________________ ________________ ______________ Question 1 Frank Crosby started a lawn mowing business (Crosby’s Cutters) as a temporary job which he intends to run until he starts his business degree at the University of South Australia in four months. Frank has never owned or run a business before. To start the business on 1 April 2012, he deposited $1,000 in a new bank account in the name of the business. The $1,000 consisted of a $600 loan from his father and $400 of his own money. Frank rented lawn equipment, purchased supplies, and hired friends to mow and trim his customer’s lawns. At the end of each month, Frank sent invoices to his customers. On July 31, he was ready to dissolve the business and start his university studies. As he was so busy, he kept few records other than his cheque book and a list of amounts owed to him by customers. At 31 July, Frank’s business account cheque book shows a balance of $690, and his customers still owe him $500. During the period, he collected $4,250 from customers. His cheque book lists payments for supplies totalling $400, and he still has fuel, whipper snapper cord, and other supplies that cost a total of $50 on hand at 31 July. He paid his employees $1,900, and he still owes them $200 for their final week of work. Frank rented some equipment from Scholes Machine Shop. On 1 April, he signed a six-month rental agreement on lawnmowers and paid $600 for the full period. Scholes will refund the unused portion of the prepayment if the equipment is in good order when he returns it. In order to get the refund, Doug has kept the equipment in excellent condition. In fact, he had to pay $300 to repair a mower. To transport employees and equipment to jobs, Doug used a trailer that he bought for $300. He believes that the period’s work used up one-third of the trailer’s service potential. The business cheque book lists a payment of $460 for private cash withdrawals by Doug during the period. Doug paid his father back during July. Frank estimates that he spent approximately 70 hours working on the business during the period. He plans to recommence operations on a similar basis during major breaks in his university study and believes he will do better in later periods as he now has an existing customer base to work from. Required 1. Prepare the business income statement for the period.(9 marks) 2. Prepare the classified balance sheet at the end of the period.(11 marks) 3. Was Frank’s venture successful? Give the reasons for your answer. 150 – 250 words only. (5 marks) Total for Question 1: 25 marks Answer on following pages please Q1 CROSBY’S CUTTERS Income statement For the period ended 30 march 2013 Income: Revenue $4,250 Expenses; Suppliers $400 Salaries and wages $1,900 Rent $400 Repairs $300 Transport $100 Loan $ 600 Total expenses $3,700 Profit $550 Q2 CROSBY’S CUTTERS Balance sheet For the period from 1st April to 31st July Assets Trailer $300 Bank $690 Debtors $500 Prepaid rent $200 Assets at hand $50 Total assets $1,740 Liabilities Capital $400 Salary in arrears $200 Drawings $460 Profit $550 Total liabilities $1,610 .Q3.Franks venture was successful, this is because: i) He was able to recoup the capital he had invested in the business ii) He earned income from the business of which he would not have made if he did not venture in to that business iii) He made profit from the operations of the business which justifies the that investment.. iv) He gained assets which will help him in the future in continuing with the business.... v) He paid his employees for that period of time he operated the business. vi)He was able to pay for all the things he had bought on credit........................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... Question 2 The owner of a business reviews the income statement prepared by you and asks, “Why do you report a profit of only $30 000 when cash collections of $100 000 were received and cash payments for the period totaled only $50 000 for expenses?” How would you respond to the owner’s question? Total for Question 2: 6 marks .In a sole proprietor business the owner establishes the business. It is the owner who carries on and operates the business. The owner is the manager and controls the business in terms of planning coordinating and making decisions. The owner of the business may report less profit because of making drawings from the business. Drawings are not treated as expenses in the preparation of profit and loss account of a business, this is because the owner and the business are one and the same that is no perpetual succession. For example a person who operates a retail shop may take some of the items for sale like cooking fat and use it for his own purpose without paying for it. This is not treated as an expense or a debt because it has been withdrawn by the owner. This is according to the international financial standards and the international accounting standards. .................................................................................................................................................................................... Question 3 J. Stott submits to you draft accounts for the year ended 30 June 2013, and a balance sheet as at that date. Towards the end of the financial year his accountant resigned and he had completed the records himself. He thinks that errors have occurred and asks your help. An examination of the accounting records reveals the following: 1.   Rent due from customers See and Els amounting to $800 is not included in the accounts. 2.   A payment of $1300 for new office furniture has been incorrectly debited to the Sundry Expenses account. The furniture had been purchased late in June 2013. 3.   Commission due to sales representatives for the month of June, $1400, has been overlooked. 4.   Repairs to Stott's private motor vehicle, $840, have been debited to the Vehicle Expenses account. 5.   A payment of $11 000 on 1 July 2012 for additions to buildings has been debited to Repairs and Maintenance. 6.   A fire insurance policy covering buildings was taken out on 30 April 2013, the annual premium of $720 being paid in advance on this date and debited to the Prepaid Insurance account. 7.   Interest of $600 on the investments held by the business was due, but has not been received. 8.   No depreciation has been recognised for the year ending 30 June. The draft balance sheet shows the following: Depreciation is to be calculated as follows:  Buildings: 2% on cost  Office furniture and equipment: 20% on cost. Required A.   Ignoring GST, show the journal entries required to make the necessary adjustments/corrections listed.(18 marks) B.   Calculate the effect (increase or decrease) of each of the adjustments on the profit figure of $20 300 as shown in the draft accounts.(4 marks) Total for Question 3: 22 marks Answer on following pages please. A. Date Details Debit Credit 30 june 2013 Rent omitted: income account Debtors account $800 $800 June 2013 Office furniture Sundry expenses $1,300 $1,300 June 2013 Sales expenses Income account $1,400 $1,400 July 2013 Drawings account Vehicle expenses account $840 $840 July 2012 Buildings account Repairs and maintenance $11,000 $11,000 June 2013 Insurance expenses account Prepaid insurance account $120 $120 June 2012 Accrued income Debtors account $600 $600 June 2013 Depreciation account Accumulated depreciation account(buildings) Depreciation account Accumulated depreciation account(furniture) $1,820 $2,360 $1,820 $2,360 B. Profit adjustment Profit $20,300 Add: rent omitted $800 Motor repair $840 Repairs $11,000 Investment interest $600 $13,240 Less: sales commission $1,400 Insurance $120 Depreciation $4,180 ($5,700) Adjusted profit $27,840 Question 4 Lucy Chan owns an online financial services company called RightFinance.com. She has some idea about accrual accounting but is not very clear on what to do, so she has come to you for help. Lucy aims to achieve a profit margin on her business of 10%. That is, she expects profit divided by total revenue to be at least 10% or more. Lucy has provided the income statement below, which shows a profit margin of 7% ($29 000/$414 285). If the profit margin falls below 10%, Lucy intends to sell the business. Lucy knows that some accrual accounting adjustments need to be made and that is why she is seeking your help. To determine the adjustments that need to be made, you have a long discussion with Lucy that reveals the following: 1.   The fees revenue includes $900 for cash received but the services have not yet been provided to the customer. 2.   A staff member went on holidays at the end of June and his July wages of $2300 are included in ‘salaries'. 3.   A prepayment of rent of $1400 for June is still shown in the balance sheet as an asset. 4.   Depreciation expense of $6000 for the year has not yet been charged to the accounts. Required A. Prepare the required adjusting journal entries.(8 marks) B. Reproduce the revised Income Statement as it would appear after the adjustments have been processed. (6 marks) C. Should Lucy retain the business or sell it, given her requirement that the profit margin must be 10%? Explain the reason for your conclusion, showing calculations.(4 marks) Total for Question 4: 18 marks A. Date Details Debit Credit 30 june 2013 Prepaid revenue Fees revenue $900 $900 June 2013 Income account Salaries account $2,300 $2,300 June2013 Rent expenses account Prepaid rent account $1,400 $1,400 June 2013 Depreciation account Accumulated depreciation account $6000 $6000 B. Rightfinance.com Revised income statement For the year ended 30 june 2013 Income: Fees Revenue $413,385 Expenses: Salaries $280,870 Subcontracting expenses $57,815 Council rate expense $2,600 Insurance expense $7,000 Advertising expense $12,500 Rent expense $21,200 Sundry expenses $2,400 Depreciation expense $6,000 ($390,385) Profit $23,000 C. Lucy should not retain the business. This is because her requirement to achieve a profit margin of business 10% has not been achieved. Profit margin = $23,000/$413,385 = 5.56% The profit margin is below 10%. She should not continue with the business. Question 5 The following information has been extracted from the financial statements and notes of Jack and Jill Pty Ltd, consultants. Required A. Calculate the following ratios for 2013: 1. return on total assets (2 marks) = Sales revenue/average total assets = $870,000/$810,000 = 1.07 2. return on ordinary equity (2 marks) = net income/ ordinary equity = $78,750/$165,000 = 0.48 B. Calculate the following ratios for 2012 and 2013: 1. profit margin (1½ marks each year) 2012 = net income/net sales = $84,150/$862,500 = 0.098 2013 = $78,750/$870,000 = 0.091 2. debt ratio (1½ marks each year) 2012 = debt/sales revenue = $495,000/$862,500 = 0.57 2013 = $450,000/870,000 = 0.52 3. times interest earned (1½ marks each year) 2012 = interest/net income = $4,200/$84,150 = 0.05 2013 = $4,200/$78,750 = 0.053 D. What do these ratios show in relation to the company's profitability and financial stability? (5 marks) i) The company is doing good in terms of profitability. ii) The debt to equity proportion is good, it falls at the required rate. iii) The company financial stability is good. There is good management of the company hence the returns are attractive. iv) The company has a strong financial base. Total for Question 5: 19 marks Read More