For BILL TUTOR only (Read Carefully)

Abstract

This paper is about continuing case CC1, CC2, CC7 part one, and CC8 part one. The case studies concern Natalie, a new entrepreneur who would like to start a business in cookie making. The paper has covered questions concerning information contained in the financial statements, financial ratios helpful for extending credit to customers as well as advantages and disadvantages of credit cards to the business. Besides, the paper also looked at the weaknesses in the internal control system that John, a proposed accountant to Natalie’s company is suggesting putting in place. Another fact that the paper touched is forms of business organization that Natalie can consider operating. Three forms were appropriate, and they included sole proprietorship, partnership, and corporation. For her case, she chose to work as a corporation. Lastly, the paper also covered different aspects including the need for separate bank accounts and the use of personal assets in the business operation.

Continuing Case CC1

Natalie has considered starting her business in cookie making which she will operate on a part-time basis. She will offer the services in people’s homes, and the possibilities seem endless. She has also decided to include group sessions during school holidays and target children as part of her cookie market. This case study has few questions that I will answer accordingly in the following sections.

Forms of business organization

Basing on the information given about Natalie, we can assume that she has the entrepreneur spirit and views this business venture with “possibilities seeming endless.” A further implication is made in that she is enrolled in an entrepreneurship program at school. To start her business, I believe sole-proprietorship is the best option for her. In a sole proprietorship, you generally receive more favorable tax treatment, and it is simpler to establish. I believe this option is a great way to get things rolling, with hopes of growing into a corporation one day. However, the flaw to this option is that if her business fails she is personally liable for all debts.

Moreover, Natalie can also consider forming a partnership with friends who may be interested in the business. It is a legal form of business between two or more people who share costs and profits (Jewell, 2018). One disadvantage for this form of business is that the liability may be unlimited so that when the business fails, the partners become responsible for any debts incurred. Besides, partnerships are accompanied with different forms of risks and friction between the partners concerning management of the business. On the other hand, partnerships have advantages over the sole proprietorship. First, two heads are better than one because they can have more ideas of raising capital and managing the business. Secondly, establishing the business is easy because partners contribute capital proportionately, and lastly, sharing of income from the business reduces the tax liability resulting in tax savings (Jewell, 2018). To end the partnership, I recommend Natalie to seek for legal guidance and advice for efficient and peaceful termination.

Lastly, Natalie can register her business as Cookie Creations Inc. so that she operates as a corporation. This would require her to act as the promoter of the company from the registration to the official commencement of the business. One advantage of corporations is that they have limited liability and in case of insolvency, Natalie’s wealth will not be used to offset any debts. However, she will need a lot of capital to set up the corporation. This will include seeking debt finance from creditors and other interested o rather potential investors.

Need for accounting information

Natalie will need accounting information. She may not need an accountant, but she needs to understand how to make finical statements. I believe it will help her immensely, as she will need it when making presentations to creditors to receive loans and it will organize all the important information about her business. It will organize it by showing the assets, liabilities, expenses, and revenues of the company. Also, with a financial statement, you will have any information needed at any time, if investors and creditors would like to see a Statement of cash flows to see how the business is using cash it could do so with the financial statement. Besides, accounting information such as profitability, liquidity, solvency, and market valuation of her business is essential to help her understand how the business is performing in general (Edwards, 2013).

Furthermore, Natalie will need periodic information to understand the progress of the business. For instance, since she is a beginner, she may need to understand the monthly performance of her business. As a result, she will need monthly reports of her business profitability, liquidity and solvency information.

Possible accounts for Cookie Creations

The core makeups of business are assets, revenue, liabilities, and expense. For Natalie’s her assets will most likely be her tangible possessions such as her oven, instructional materials wither it be cooking supplies or workbooks and things of that nature. Her primary revenue will be drawn from the individuals signing up for her class. She will have many expenses to deal with such as for all her assets, she will need to create a contingency account in case of an unfortunate, unforeseen event, and just the basic operational items needed to run her business. Depending on her current financial situation, she may incur a little or many liabilities. If she has a lot of money saved for her business, then she will not have to deal with creditors as her main source of the liabilities are creditors, this all depends on her financial stability.

Need for Separate Bank Account

I believe she should open a separate account as it may give growth for conflict of interest. An example is with the revenue gained from her business, instead of reinvesting it into expanding the business she may use for a personal consumption instead of business disposition. Moreover, according to Edward (2013), a business entity is treated as a separate entity from the owner according to the accounting principle of the separate economic entity. Therefore, the business must have a separate bank account from the owner’s account.

Use of business and personal assets

According to my accounting knowledge, Natalie can use her car for the business operations. However, she will be required to calculate periodical expenses of using the car and deduct the percentage for personal use. For instance, if her monthly expenses for the car is $ 1000, and she confirms that 70% of the usage is for business purposes, then $700 will be an expense to the business while $300 her personal expense which she should pay from her pocket and not the business. This is convenient because she is a small enterprise owner and she may not have enough capital to purchase a vehicle for the business. Therefore, using the personal car and keeping a record of expenses about business would be prudent for the growth and development of her new business (Pakroo, 2018).

Continuing Case CC2

From the case study, Natalie has decided to operate her business as a corporation. Moreover, she has made a deal with the manager of Biscuits for the supply of inputs for making cookies. She has been presented with financial statements, and there are few questions to address in this section.

Information in a financial statement

A financial statement is a combination of five major financial reports of a business. The reports are income statement, the balance sheet, cash flow statement, statement of changes in shareholders’ equity, and notes to the financial statements. Income statement, formerly called profit and loss statement, is used to report the revenues, expenses, and profit or loss of a company for a specific period. A balance sheet, also called a statement of financial position, reports the assets, liabilities and shareholders’ equity as at a given period. Simply, it indicates the financial standing of the company on a certain date. The statement of cash flow shows the inflow and outflow of cash about financing activities, investing activities, and operating activities. The statement of change in equity indicates the shareholder contribution, and movement in equity, and equity balance at the end of accounting periods. The information shown includes the classification of share capital, total share capital, retain earning, dividend payment, and other related reserves. Lastly, the notes to the financial statement are essential despite people ignoring it. It is mandatory by IFRS that every corporation must prepare this statement. Essentially, the statement details information or rather explanations related to specific accounts.

Statements to show whether Biscuits can meet current liabilities

Natalie will need the balance sheet, particularly the current liabilities and current assets that give the current ratio and acid test ratio. These ratios indicate whether the company can meet its current liabilities using the available current assets. To calculate current ratios, compare the current assets to current liabilities. When the ratio is less than one, it means Biscuits assets cannot meet its current liabilities fully using the available current assets. On the other hand, when the ratio is above one, the company can meet its short-term obligations fully using the current assets. A current ratio of one is recommended for any business including Biscuits. (Easton & Sommers, 2018).

Statements to show whether Biscuits can survive long periods

Natalie will look at the balance sheet and the income statement to determine debt ratio and debt-equity (solvency ratios). This ratio will indicate the long-term survival of the business in the market (Easton & Sommers, 2018). The debt ratio indicates the percentage of assets that are financed by the debt. To calculate the ratio, the total debt is compared to the total assets of the company. Low debt ratio indicates strong financial stability and the company can survive long periods.

On the other hand, the debt-equity ratio indicates the proportion of the shareholder's equity and debt used to finance the assets of the company. A lower ratio indicates that the company has not been utilizing its capacity to use debt finance while a higher ratio shows that the company uses debt to finance its assets. Therefore, it may not be able to generate funds for growth and development in the end.

Statements to show whether Biscuits are profitable

The income statement will provide information such as gross revenue, net income, and sales. This information will be used to determine profitability ratios such as gross profit margin and net profit margin. This is major ratios in determining the profitability of a company (Easton & Sommers, 2018). Gross profit margin indicates the ability of the company to generate profit after deducing cost of revenues. Operating income ratio indicates the company’s ability to generate income after deducting operating expenses and cos of revenues, while net profit margin indicates the ability to generate net income after deducting all expenses including tax and interest rates.

Interest and debt repayment

I would recommend her going over the annual report and paying close attention to the auditor’s remarks, after which I would recommend her to compute the debt to total assets ratio so that she can measure the long-term debt-paying ability. In doing so, she will discover that if they have a high percentage, then this company is not safe to invest with. Besides, she should also calculate times interest earned ratio, which indicates the number of times net income can be used to pay interest charge (Easton & Sommers, 2018).

Dividend payment from Biscuits

Natalie should determine the dividend yield from the financial statement received from Biscuits Dividend yield indicates the amount that Biscuits pays out in dividends each fiscal year relative to the share price. It is calculated by dividing the dividends paid by the dollar value of the share. I high dividend yield indicates that the company generates high net income available for common stockholders. Therefore, it is viable for investment and Natalie can consider the implementing the deal. (Easton & Sommers, 2018)

Other areas of concern

Only a part of the annual report was given to her, which is the financial statement. I urgently recommend her reviewing all aspects of the annual report such as the auditor’s report and the MD&A report. Lastly, when you try to compute a forecast, past performances are used to help depict what future will shape out to be. Therefore, I would finally recommend her doing, and income statement snapshot of the company’s past and current performances.

Continuing Case CC7

Identifying weaknesses in internal control

First, John has not considered segregation of duties. He seems to be working alone, signing all documents and managing finances alone. This is dangerous because he may present fraudulent information, which Natalie may not understand. Instead, John should ensure segregation of duties and authority so that not a single person would sign and authorize checks and financial documents. This would reduce fraud. Secondly, locking the cash in the vehicle is not safe. John and Natalie should find a safe in which all cash can be locked up until it is enough amount for deposit. Alternatively, they should link with a financial institution such as a bank and ensure that the bank collects any amount at certain periods of the week or month. Another loophole is transferring all accounts information into John’s laptop. Cookie Creations Inc. should have a system in which all accounting information is stored for each access and retrieval.

In summary, at least two or three persons should sign all checks. A different person should write checks for the workers instead of workers writing checks for themselves. They may exaggerate the amounts.

Continuing Case CC8

Ratios to determine and questions to ask Curtis

Natalie can determine the following ratios:

· The ratio analysis especially the debt, liquidity and profitability ratios. Liquidity ratio measures the ability of Biscuits to repay its short-term obligations using the available current assets. They include the current ratio and quick test ratio. Profitability ratios measure the ability of the company to generate profit using the available assets. They include the gross profit margin, net profit margin and earnings per share.

· Estimate the level of debt-to-equity ratio. This will help in determining the proportion of debt and equity used to finance the company’s assets.

· Calculate the return on equity; it shows the returns a company gets from the invested assets.

· Calculate the current ratio of the company. It measures the ability of the company to meet its short-term financial obligations using the available current assets.

· Compute the return on investment or sales. Indicates the amount a company generates from the investments in the form of profit.

Natalie should ask him a question regarding the computations on the liquidity, profits and debt levels. The additional questions will be on the current liabilities stand and the financing structure of the company. She should also inquire about auditing and the audit report. The financing structure, which mainly takes the form of debt and equity, is key in guiding the credit status and the liquidity of the company. Lastly, the company should decide to give Curtis credit if the above ratios indicate a company with stable cash inflows. The computations should also reflect on the cash available and collectibles for settling the debt levels.

Alternative to extending credit to Curtis

I think to hire purchase would be a good alternative to credit purchase. In hire purchase terms, Curtis would pay a deposit and periodic installs for an agreed period. This would be convenient for both.

Advantages and disadvantages of credit

One advantage of credit is that it is convenient for the customers and they can make purchases at any time. This increases the sales of the company. Besides, credit cards also help customers build their credit and earn rewards and cash backs, thus enhancing customer loyalty. Lastly, it also improves the company’s cash flows (Bernstein, 2018).

On the other hand, credit cards increase the costs due to the processing fees for payments. Moreover, they come with increases chances of fraud and disputes. Finally, it also complicates record keeping for the company (Chin & Bruine de Bruin 2018).

References

Bernstein, A. (2018). Accepting payments by means other than cash is a business necessity. Journal of Aesthetic Nursing, 7(3), 174-175.

Chin, A., & Bruine de Bruin, W. (2018). Helping consumers to evaluate annual percentage rates (APR) on credit cards. Journal of Experimental Psychology: Applied.

Easton, M., & Sommers, Z. (2018). Financial Statement Analysis & Valuation, 5e.

Edwards, J. R. (2013). A History of Financial Accounting (RLE Accounting). Routledge.

Jewell, J. N. (2018). The power of partnership. In The Business of Farm Animal Welfare (Vol. 73, No. 85, pp. 73-85). ROUTLEDGE in association with GSE Research.

Pakroo, P. (2018). The small business start-up kit: A step-by-step legal guide. Nolo.