Accounting For Business Essays Examples

Question 1

Income Statement
Classified Balance Sheet
Mark’s venture successful
Given the income statement, the Mark’s business is shown as profitable generating a profit of $2700 which is an indication of success.

Question 2

Inventory method used by each business and how one can determine that from the provided information
The clothing store uses the perpetual system where it continuously updates its sales and purchase transactions. That can be determined from the information given that the shop assistant could check the availability of clothes in their store and the other stores just by looking at the computer. On the other hand, the fruits and vegetable business uses the periodical system that does not entail continuous update. That can be determined from the information given that the purchases made were not recorded immediately.

How the inventory methods work determine cost of the sales

Perpetual and periodical systems of inventory are two methods of record keeping for the inventory. In the system of perpetual inventory, cost of the sold goods and merchandise inventory updating is done continuously after each purchase and sales transaction. The other transactions that may require updating to the inventory account are such as purchases/sales return and discounts on purchases. For purchases, they are debited directly to the inventory account while for each single sale there are two entries made in the journal: one recording inventory sales value and the other recording goods sold cost. In the system of perpetual inventory the account of purchases is not included. In the system of periodical inventory, the cost of the sold goods and merchandised inventories are not continuously updated. Instead, recording is done by purchases on the purchases account with each transaction of sale being recorded through a single entry in the journal. Thus, the account of the cost of sold goods is not in existence during the period. These are determined by the accounting period end through the closing entry.

Need for physical inventory stock take

The physical inventory take is necessary to ensure that the physical merchandise in the store is in line with the computer records. It would also help identify any errors in record entries and unrecorded goods movement.

Balance of the inventory accounts for the fruits and vegetable store

Given that there is no continuous recording of the sales transactions the inventory account presents the purchases made hence measures the cost of merchandise for the business.

Question 3

Effect of each adjustment on the profit of $18,700
Given the journal entries, the following is the summary of the effect of the items effect on the profit with Add items increasing the profit while fewer items decrease the profit.
Given the items, the total effect of all items would be reducing the profit by $10,538.57 which has an result of reducing the indicated profit of $18,700 to $8,161.43

Question 4

Statement of Cash Flow
Some cause of the difference between the profit and the total cash-flows
Some of the causes of differences between the profit and the total cash flows are the items that are deducted from the profit such as depreciation but that do not involve cash payment or transactions. With that, the depreciation amount reduces the profits while the amount is not deducted in the total cash-flows (Atrill & McLaney, 2014).

Information provided by Statement of the Cash Flow that is not provided by the other statements

The cash-flow statement provides information on the flow of cash. Thus, it shows where the cash comes from and is expensed. With that, it indicates that change in the cash level and the company’s liquidity that are not indicated by the other statements that show that profitability, financial and equity position (Ittelson, 2009).

Question 5

1. Ratios for 2015

A. Return on the total assets

B. Return on ordinary equity
2. Ratios for years 2014 and 2015

A. Profit margin

B. Debt ratio
C. Times interest earned

Ratios interpretations

Given the above financial ratios, the profitability and financial position of the business can be summarized as follows. With a ROA of 10.11% and return on equity of 17%, it is an indication that the business has a suitable and high profitability in 2015. With that, the business is efficient in profits delivery given the level of assets and equity employed. Regarding the profit margin trend between the year 2014 and 2015, the increase from 9.05% t0 9.76% is an indication that the business had improvement in profit making in addition to having substantial margins. Regarding the debt ratio, which shows the level of assets funded by debt shows that more than half of the assets are funded by debt and the debt level slightly increased in 2015 compared to 2014. Finally, the times interest earned that shows the ability of the EBIT to meet the interest expense. The ratios show adequate profitability for the business to pay for its interest expense and that ability decreased in 2015 as compared to 2014 (Atrill & McLaney, 2014).

Limitations of the ratio analysis

There are few key limitations for financial ratios including
Many huge firms operate various divisions in many different industries. Hence, it is challenging to get meaningful average ratios for industry.
Inflation might have a badly distorted the balance sheet of the company. Thus, the profits are will be affected and the ratios analysis for one company for a given period of time or comparative analysis for companies over a period ought to be interpreted together.
The seasonal factors may also distort the ratio analysis. Having an understanding of seasonal factors which affect business may reduce misinterpretation chance. For instance, retailer's inventory might be high during summer as a preparation for back to the school season. This results to payables accounts been high.
Further, different practices of accounting can make comparisons difficult even within one company in comparisons of such things like buying versus leasing of the equipments, FIFO versus LIFO.
Finally, it’s hard to generalize whether a given ratio is bad or good one. A cash ratio that is high in a company that is historically growth classified may be considered to be a good indicator, also it can be interpreted that a company has secede to be growth company which means it should command valuations that are lower (Atrill & McLaney, 2014).

Reference list

Atrill, P. & McLaney, E., 2014. Accounting and Finance. 7th Ed. New York: Pearson.
Ittelson, T., 2009. Financial Statements: A Step-by-Step Guide to Understanding and Creating Financial Reports. New Jersey: Career Pr Inc.