ACC506 : Accounting - Julie And Katy - Assessment Answer

Accounting Assignment

Assignment Task

• Write a brief report to Julie and Katy commenting on the financial performance of the business:
• Calculate the following financial ratios and provide comments –

  • Current ratio

    • Industry average is 5:1
    • Accounting Norm is 3:1

  • Quick ratio

    • Industry average is 4 : 1
    • Accounting Norm is 1:1

• Calculate and provide a cash flow statement for the first month of trading.
• List and briefly explain the registrations and legal requirements that Katy would have undertaken to establish the business name as a sole trader.
• Katy is contemplating forAlex Perry a partnership or a company. What extra General Ledger accounts would have to be created for

  • A Partnership
  • A Company

The previous part that is the financial statements show the financial results of the business for the given period. But in order to analyse how the business actually performed and whether or not it was able to achieve the industry standards it is important to apply a few basic ratios to the financial results.

A very important prospect for any new business to operate and sustain is market is maintenance of liquidity. Only accumulating assets, of semi or non-liquid nature may lead to extreme financial crisis. Therefore to maintain solvency, liquidity is essential.

The mentioned aspects can be analysed with the help of the following rations:

Current Ratio

The organisation’s Current ratio is 1.41. This figure implies that, to fulfil any immediate future liabilities, the organisation has 1.41 times the resources. A positive Current ratio is necessary for the business to sustain in the long run as the current liabilities arise as a result of the day to day operations, and therefore the current assets, which are also a part of the cycle, should be enough to pay the operating liabilities.

The organisation’s ratio, even though favourable, is way lower than the industrial average of 5:1. It is even below the ideal ratio as per the accounting norm of 3:1. Since it is a new business, there are good chances of the ration improving in the next cycle.

Quick Ratio

Even though Current ratio is an important and popular tool, to judge the actual liquid position of the organisation, a better test is the Quick ratio. Also known as Acid test Ratio, this technique is used to analyse the position of the organisation to extinguish its current liabilities immediately.

The basic difference is that the current assets that are readily and immediately convertible into cash are only taken against the current liabilities. These are the generally all the current assets except inventory. These are called liquid assets.Therefore, At present, the Quick Ratio of the organisation is 1.28, as against the industry average of 4:1. This implies that, to sustain in the chosen industry, the organisation has to increase its proportion of quick assets against current liabilities.

However, the accounting norm for the ratio is 1:1. On this perimeter the organisation lies on the higher end.

It is important however, to take steps to improve the overall liquidity of the organisation.

Cash Flow Statement

The cash flow statement presents a clear picture regarding cash profits of the organisation for a given period.

The cash flow statement displays a positive balance of cash at the month end. The overall Cash flow is positive, that is, the cash inflow is higher than the cash outflow.

Registration

To establish the business as a proprietary concern, the following are the registration and legal formalities and requirements that are needed to be fulfilled:

1. Acquiring an Australian Business Number (ABN), for initiating the registration process. ABN is to be necessarily acquired before the commencement of any business.
2. Registration of the proposed business name with adequate authority within the stipulated period.
3. Getting registered under GST act and therefore acquiring a General sales Tax registration Number.
4. Obtaining the necessary industrial licenses and permissions required to conduct the given business.
5. Leasing or renting the business premises must have been on the basis of a rental or leasing agreement.
6. Getting business insurance, as it is an inventory based business.
7. Opening a Business bank account. Australian Business Bank Account with a reputed bank will ensure proper management of funds.

Additional General Ledger

For a partnership firm the additional ledgers to be prepared are:

1. Partner’s Capital account- Fixed as well as fluctuating.
2. Drawings Account
3. Partner’s loan and Remuneration account.

In Case of a company the books of accounts are to be prepared much more systematically, as there are also legal requirements regarding the same.

The additional General Ledgers to be prepared while accounting for a company are:

• Equity share capital account, and other related accounts like Share discount, Premium, etc.
• Reserves and Surplus: Accounts for various reserves and surplus is to be created and then accounted for in the note for reserves and surplus. In case of a company, apart from general reserve, there are other reserves required to be maintained as well, like Workmen Compensation reserve.

As the accounts of a company are required to be periodically audited, under various laws, the formation and maintenance of books of accounts is far more complicated and systematic.