Reference no: EM133301330

Interpretation of Financial Statements and Budgetary Control

Learning Outcome 1: Examine the context and purpose of accounting
Learning Outcome 2: Prepare basic financial statements for unincorporated and small business organisations in accordance with accounting principles, conventions and standards
Learning Outcome 3: Interpret financial statements
Learning Outcome 4: Prepare budgets for planning, control and decision making using spreadsheets

Assignment Brief

Scenario

Task 1
You have recently established your own accounting practice and have been invited to make a ‘pitch' to a potential client. In your report, your aim is to persuade the client of the value of financial & management accounting and the accounting techniques in informing decisions, maximising performance and helping to ensure long-term sustainable growth.

Your report will cover:
1 Examining the purpose and scope of accounting in complex operating environments.
2 Critically evaluating the role of accounting in informing decision making, as well as meeting stakeholder and societal needs & expectations.
3 Assessing the accounting function within the organisation in the context of regulatory and ethical constraints.

Task 2
The following balances are taken from books of ABC Co. Ltd. at the end of the first year trading on 31 December 2020.

	Debit	Credit
	$	$
Sales		40000
Purchases	18500
Wages and salaries	5100
Repairs and maintenance	1300
Heating and lighting	900
General expenses	1200
Insurance	800
Cash at bank	2200
Cash in hand	1300
Trade receivables	4100
Trade payables		3400
Premises	30000
Fixtures and fittings	10000
Motor vehicles	8000
Capital at 1 January 2020		52000
Drawings	12000
	95400	95400

2.1 Prepare the financial statements of ABC Co. Ltd. for the first trading year, i.e. 1) a profit and loss statement (income statement) and 2) balance sheet (statement of financial position, based on the information from above trial balance.

Task 3

Ann and Ben are in partnership sharing profits and losses in the ratio 3/5:2/5, respectively. The following is their trial balance as at 30 September 20X5.

	Debit	Credit
	$	$
Buildings (cost $210,000)	160,000
Fixtures at cost	8,200
Provision for depreciation: Fixtures		4,200
Debtors	61,400
Creditors		26,590
Cash at bank	6,130
Stock at 30 September 20X4	62,740
Sales		363,111
Purchases	210,000
Carriage outwards	3,410
Discounts allowed	620
Loan interest: P Prince	3,900
Office expenses	4,760
Salaries and wages	57,809
Bad debts	1,632
Provision for doubtful debts		1,400
Loan from P Prince		65,000
Capitals: Ann		100,000
Ben		75,000
Current accounts: Ann		4,100
Ben		1,200
Drawings: Ann	31,800
Ben	28,200
	640,601	640,601

Prepare a trading and profit and loss appropriation account for the year ended 30 September 20X5, and a balance sheet as at that date.

(a) Stock, 30 September 20X5, $74,210.
(b) Expenses to be accrued: Office Expenses $215; Wages $720.
(c) Depreciate fixtures 15 per cent on reducing balance basis, buildings $5,000.
(d) Reduce provision for doubtful debts to $1,250.
(e) Partnership salary: $30,000 to Ann. Not yet entered.
(f) Interest on drawings: Ann $900; Ben $600.
(g) Interest on capital account balances at 5 per cent.

Task 4 The following trial balance of The EFG Golf Club was extracted from the books as on 31 December 20X3:

	Debit	Credit
	$	$
Clubhouse	142,000
Equipment	18,600
Profits from raffles		6,508
Subscriptions received		183,400
Wages of bar staff	29,200
Bar stocks 1 January 20X3	9,400
Bar purchases and sales	41,300	84,600
Greenkeepers' wages	21,500
Golf professional's salary	37,000
General expenses	910
Cash at bank	3,924
Accumulated fund at 1 January 20X3	29,326
	303,834	303,834

Notes:
(i) Bar purchases and sales were on a cash basis. Bar stocks at 31 December 20X3 were valued at $6,410.
(ii) Subscriptions paid in advance by members at 31 December 20X3 amounted to $1,870.
(iii) Provide for depreciation of equipment $2,400.

Draw up the bar trading account for the year ended 31 December 20X3.

Draw up the income and expenditure account for the year ended 31 December 20X3, and a balance sheet as at 31 December 20X3.

Task 5

Calculate and present the following financial ratios using the financial reports of XYZ Co. Ltd. (refer to page 8-10) for the years 2017 - 2019. Round all answers to 2 decimal places.

- Total cost of goods sold (COGS) ratio
- Gross profit ratio
- Net profit ratio
- Wage expense ratio

Industry average of financial ratios in profitability:

Gross profit ratio	70%
Net profit ratio	10%

Compare the performance of XYZ Co. Ltd. for the years 2017 - 2019 using the financial ratios.

Critically summarise the performance of the business over the years, as well as with reference of the above industry average financial benchmarks. Identify the limitations of using financial ratios as performance measures.

Task 6

The directors of ABC Co. Ltd. were concerned about the company's cash flow.

(i) The following sales figures are for the months of November 2020 to June 2021. The figures from January 2021 onward are estimated:

	$
Actual sales:
November 2020	60000
December 2020	64000
Forecast sales:
January 2021	65000
February 2021	70000
March 2021	72500
April 2021	76250
May 2021	80000
June 2021	78750

Half of the sales are normally paid for in the month in which they occur and the customers are rewarded with a 5% cash discount. The remaining sales are paid for net in the month following the sale.

(ii) Goods are sold at a mark-up of 25% on the goods purchased one month before sale. Half of the purchases are paid for in the month of purchase and a 4% prompt settlement discount is received. The remainder is paid in full in the following month.

(iii) Wages of $12000 per month are paid in the month in which they are earned. It is expected that the wages will be increased by 10% from 1 March 2021.

(iv) Rent will cost $60000 per annum payable three monthly in advance in January, April, July and December each year.

(v) The directors have arranged a bank loan of $60000 which would be credited to company's current account in February 2021.

(vi) The half-yearly interest on 200000, 8% debentures of $1 each is due to be paid on 15 January 2021.

(vii) The ordinary dividend of $12000 for the year 2020 will be paid in February 2021.

(viii) The bank balance at 31 December 2020 is $12000.

Prepare a cash budget for the four months ending 30 April 2021. Give your answers to the nearest dollar ($).

Discuss the benefits and limitations of budgets and budgetary planning, and control for ABC Co. Ltd. Evaluate the extent to which using budgets can help to identify problems and corrective actions.

Justify budgetary control solutions and their impact on organisational decision making to ensure efficient and effective deployment of resources.

Attachment:- Accounting Principles.rar