Accounting Fundamentals

Accounting Fundamentals

The report is to be completed individually or in groups of 2 students. Reports are to be 750 – 1,000 words and include an Executive Summary, the body of the report, and a Summary of Findings. All calculations must be placed in an appendix at the end of the report. Reports should be of appropriate standard as to be submitted to management and contain appropriate content to meet the needs identified by the company. The submitted report must include an Assignment Cover Sheet at the front. This can be downloaded from Blackboard. The assignment is to be submitted via Blackboard by midnight Friday 1 February 2013
Late submissions will attract penalties as outlined in the Unit Outline. The assignment is to be submitted as a single Word document.

ACF110 Accounting Fundamentals page 2
Study period 4, 2012
Safety Styles Pty Ltd – Background
Simon Sergio is the owner of Safety Styles Pty Ltd, a local business that sells a variety of working clothes and safety footwear. He started the business a few years ago having worked in the area as a sales representative for a number of years. Simon employs six staff, four in the sales area and two office staff. The office staff looks after the day-to-day administration including accounts payable, accounts receivable and transaction recording. Simon takes care of payroll and related matters and has an accountant looking after the formal accounts of the business.
While pleased with Safety Styles Pty Ltd. and its performance, Simon has begun looking at expanding his operations. To go ahead with his planned expansion successfully Simon is considering the need to purchase new office equipment including new computers, a colour laser printer, a photocopy machine, and a small switchboard system. The cost of the new office equipment is $50,000.
Simon’s accountant has suggested he approach his bankers to obtain finance for the office equipment rather than use his cash or bank overdraft facility. Prior to his meeting with the bankers, Simon has been asked to provide the following information: Income Statements for the last 3 years Statements of Financial Position (Balance Sheets) for the last 3 years
The accountant was able to provide Simon with these from his accounting system. Simon sent the reports off to the bank prior to his meeting. Copies of these reports are attached.
Safety Styles Pty Ltd – The Bank’s Decision
When the bank has received all of Simon’s financial information it assessed whether or not it would approve the $50,000 finance facility.
You are the bank manager assessing Simon’s finance application. The bank’s procedures require you to assess the profitability, efficiency, liquidity and capital structure of the business using financial ratios.
Required:
1. Calculate all of the following ratios for the years 2010, 2011 and 2012. You should group the ratios under profitability, efficiency, liquidity or capital structure. Show the formula you used to calculate each ratio, the figures you used, a brief explanation of what each ratio is measuring and the trend that is being shown. Return on assets Return on equity Gross profit margin Net profit margin Asset turnover ratio (times) Inventory turnover (days) Accounts receivable turnover (days) Current ratio Quick asset ratio Gearing ratio

Include these ratios as an appendix to your report.
ACF110 Accounting Fundamentals page 3
Study period 4, 2012
2. Write a report (750 – 1,000 words) advising Simon whether or not his application for finance has been approved, the reasons why you came to that decision, and an evaluation of Safety Styles performance from profitability, efficiency, liquidity and capital structure points of view, indicating which ratios supported Simon’s application and which acted against it.
ACF110 Accounting Fundamentals page 4
Study period 4, 2012
Safety Styles
Income Statements for the years ending 30 June:
2012
2011
2010
‘000s
‘000s
‘000s
Revenue
$
$
$
$
Sales- work clothes*
2,750
2,178
1,782
Sales- safety footwear*
2,213
2,750
2,251
Total Revenue
4,963
4,928
4,033
Less:
Cost of goods sold
Cost of work clothes*
1,210
1,206
986
Cost of safety footwear*
878
2,088
888
2,094
726
1,712
Gross profit
2,875
2,834
2,321
Interest income
4
10
12
Total income
2,879
2,844
2,333
Less:
Operating expenses
Selling expenses & distribution expenses
Customer delivery costs
17
21
14
Advertising
187
182
122
Sales staff wages
268
472
389
592
261
397
Administration & general expenses
Office staff wages
220
231
189
Heating, lighting & power
42
38
32
Other office expenses
828
684
560
Stationery
16
22
18
Insurance
135
165
135
Rent
315
311
255
Depreciation
28
1,584
28
1,479
28
1,217
Finance expenses
Interest expense
8
8
6
Bad debts
111
119
88
96
72
78
Total operating expenses
2,175
2,167
1,692
Net profit before tax
704
677
641
Tax expense
60
58
56
Net profit after tax
644
619
585
*Note: all sales and purchases of work clothes and safety boots are on credit
ACF110 Accounting Fundamentals page 5
Study period 4, 2012
Safety Styles
Statements for Financial Position at 30 June:
2012
2011
2010
2009
‘000s
‘000s
‘000s
‘000s
Current assets
Cash at bank
80
200
190
185
Accounts Receivable
637
591
561
552
Inventory-work clothes
230
235
223
216
Inventory-safety footwear
325
298
283
175
Total current assets
1,272
1,324
1,257
1,128
Non-current assets
Office furniture
1,110
1,040
988
988
Accumulated depreciation
149
961
180
860
171
817
8
980
Office equipment
30
30
29
29
Accumulated depreciation
10
20
15
15
14
15
10
19
Motor vehicle
50
50
48
48
Accumulated depreciation
12
38
16
34
15
33
12
36
Total non-current assets
1,019
909
865
1,035
Total assets
2,291
2,233
2,122
2,163
Current liabilities
Bank overdraft
6
10
8
8
Accounts payable
271
253
240
244
Income tax payable
48
60
57
55
Total current liabilities
325
323
305
307
Non-current liabilities
Long term loan
50
45
43
43
Total non-current liabilities
50
45
43
43
Total liabilities
375
368
348
350
Shareholders’ funds
Issued capital
70
70
70
70
Retained earnings
1,846
1,795
1,704
1,743
Total Shareholder’s funds
1,916
1,865
1,774
1,813
ACF110 Accounting Fundamentals page 6

1. Format and layout Assignments to be submitted as a single word document Name/s and student/s included as a footer on each page Reports to be 750 – 1,000 words and include an executive summary, body of the report (give this a title) and a summary of findings and should be of appropriate standard to submit to the management and contain appropriate content to meets the needs of the company. (the appendix is excluded from the word count) Single spaced Main headings in bold type Clarity of expression, correct grammar, correct spelling
2. Ratio calculations Ratios correctly calculated for 2010, 2011 and 2012 Must be calculated to 2 decimal places Ratio calculations are to be included in a table in an appendix to the report As part of the appendix should show how each of the ratios is calculated e.g. Accounts payable turnover (days) = (Average accounts payable /Credit Purchases) x 365 Calculate the ratios for both 2010, 2011 and 2012 Calculate all ratios to 2 decimal places Use average figures where required, not year-end figures
3. Discussion You should write a sentence or two explaining what each ratio means. Use your own words, not just a copied sentence from the text. Your discussion should include the following: whether a ratio is good or bad, whether it is improving or getting worse and what it tells us about the business how each ratio influenced the bank’s decision to lend or not to lend whether the bank has granted the finance or not, and, most importantly, give reasons. consider, in general terms, how, if the bank does agree to the finance, Safety Styles Pty Ltd will be able to meet the monthly repayments.

 
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