Report On Financial Accounting

Type of paper: Report

Topic: Company, Finance, Money, Wealth, Taxes, Internet, Business, Investment

Pages: 5

Words: 1375

Published: 2020/09/24

Part A: Journal Entries to record accounting transactions

1. On December 31st the company sells on credit $5,000 of goods which had been bought a month previously at a cost of $3,500:

Debtors A/cDr5000

Cost of Goods Sold.Dr..3500
2. On December 31st the company sells an unwanted machine for $1,500. The machine was bought at the beginning of 2012 for $8,200 and was expected to be used for three years after which its value had been forecast to be $1,000.

Cash A/c.Dr 1500

Depreciation of Machinery A/c..Dr 4800

Loss on Sale of Machinery A/c Dr.1900

3. On January 2nd the company paid $500 by check for a three year buildings insurance policy.
Insurance Premium Charges A/c.Dr.167
Prepaid Insurance Premium Charges..Dr..333
* Assuming the insurance premium is evenly divided for each of the three years referred to.
4. On December 31st the manager reads the electricity meter and realizes that they will owe $100 more for electricity used than they had previously estimated.
Budgeted Electricity Expense A/c..Dr 100
5. Due to a shortage of cash the company was unable to pay December wages of one manager totaling $750, but promises to do so by January 15th 2014.

Wages A/cDr 850

6. On December 31st the company reads an announcement in the newspaper that one of their customers, who currently owes $2,000 for goods shipped in November, has filed for bankruptcy.

Bad Debt Expense A/cDr 2000

Allowance for Bad Debt Expense..Dr 2000
* Assuming the company first creates allowance for bad debts and then write-off the bade debts incurred same from the provision created.
7. In March the company declared that dividends of $5,000 would be paid for 2012 and these were subsequently paid in June.


Retained Earnings A/c.Dr 5000
Dividend Payable A/c..Dr 5000
8. During 2013 the company spent $7,500 on a project with a research company for a new product which they initially expected to introduce in 2015, but which now seems to be much less certain.
Product Research Expenses A/c..Dr 7500

Sunk Cost A/cDr 7500

*Assuming that the project is least likely to begin, the amount spent on research work will be debited towards sunk cost.
9. On December 1st the company placed an order for $15,000 of goods from a Chinese supplier, and paid a deposit of $6,000, with the remaining payment due when the goods have been delivered. The goods will be delivered in January 2014 and advertised for sale at $20000.

Advance lent for inventory purchase A/cDr 6000

*No entry for remaining $9000 will be posted as the accounting entry shall be initiated when goods will be delivered to the company.
10. The company’s managing director borrowed $1,000 in cash from the company on December 31st.

Loan Advances to Employee A/cDr 1000

11. On November 1st the company received an order for $20,000 of goods, to be delivered monthly over the next four months. On December 1st the customer made a stage payment of $15,000, and by December 31st the company had delivered half of the order from inventory. The goods were bought in at a 20% discount to the selling price.

December 1st:

Bank A/c.Dr. 15000

December 31st:

Advance received from customer a/c10000
Inventory A/cDr 10000
Cost of Goods Sold A/cDr 8000[10000*(80/100)]
12. The company owns a building which is on its Balance Sheet for a value of $250,000. On
December 31st the company’s finance manager received a call from a developer who explains that he is prepared to offer $500,000 for the building.
Building A/c..Dr 250000

Part B: Financial Analysis:

a)Horizontal and Vertical Financial Statements

Horizontal Balance Sheet

Spreadsheet Attached
Horizontal Profit and Loss
Spreadsheet Attached
Vertical Balance Sheet
Spreadsheet Attached
Vertical Profit and Loss
Spreadsheet Attached
b)Cash Flow Statement

Spreadsheet Attached

Justifications associated with possible missing data:
Referring to the cash flow statement of the company, we found that the ending cash balance does not tally with that of one given in the balance sheet of the company. This is possibly because of undisclosed accumulated depreciation for the previous years that could guide us for the depreciation expenses for the current year.
Important to note, the company has been carrying a good asset base of plant and equipment from years and the financial statements does not include any accumulated depreciation amount for these assets.
c) Company Analysis:
The objective of this section will be to decompose the ROE multiple and find out the real reason behind change in the ROE multiple of the company over the period of one year. Thus, for this purpose, we will be using Dupont equation.
i)Return on Equity: (Net Margins* Asset Turnover* Financial Leverage)

Decoding ROE through Dupont Analysis:

2012: (Net Income/ Revenue)* (Revenue/ Assets)* (Assets/ Shareholder Equity)
=(2749317/83523330)* (83523330/47762345)* (47762345/30644358)
=.032* 1.74* 1.55
2013 : (Net Income/ Revenue)* (Revenue/ Assets)* (Assets/ Shareholder Equity)
=(-42837/75266038)* (75266038/45414899)* (45414899/30198673)
=-0.0005* 1.65* 1.50
Referring to above calculations, we find that over the year, the ROE multiple of the company declined significantly from 8.67% to 0.12% only. As indicated by the Dupont equation, the primary and core reason behind the fall in ROE multiple was the decline in the net profit margins of the company that declined from 3.2% in 2012 to 0.05% in 2013. On the other hand, other variables of Dupont equation, i.e. Asset Turnover and Financial Leverage, also declined marginally. While asset turnover dipped from 1.74 to 1.65, the financial leverage declined from 1.55 to 1.50.
Thus, significant fall in net margins and marginal decline in asset turnover and financial leverage were the reason behind fall in ROE multiple of the company.
d) Report Summary
In this report, we began the analysis work by conducted the horizontal and vertical analysis of the financial statements of the company followed by the preparation of the cash flow statement. However, because of possible differences on undisclosed depreciation expenses, the cash flow statement could not tally with the closing cash figures.
We concluded the report by decomposing the ROE multiple of the company where we found that it was the fall in the net margins of the company that lead to decline in the said multiple.

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Report On Financial Accounting. Free Essay Examples - Published Sep 24, 2020. Accessed October 27, 2020.

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