Write an analytical Report to the Directors of Equip Fit in which you discuss and comment upon the following matters:
- Financial Position and Financial Performance of the company for the month of January 2015 (using appropriate financial ratios). Assume that in January 2015 the Sales and Cost of Goods Sold were 10% greater than December 2014, and Operating Expenses were 5% greater.
- The strengths and weaknesses of the company's accounting information system
- Overall strengths and weaknesses of the company's operations (eg. Suppliers & customers)
Company is using Quick Books for day to day accounting. Company has earned good profit in the month of January. This is in spite of the fact that cost of goods sold was 10% more than the December 2014 and operating expense was 5% more than that of December 2014. The balance sheet of the company is strong. Company is using Enterprise Bank account for receipts and payments. However while receiving the cheques, first of all the amount should be credited to un-deposited funds accounts. There after on a weekly frequency this money may be transferred to the bank account when it is actually deposited to the bank. The balance of accounts receivable is $ 31,000 as at 31st January 2015. The customer Lowdown has been declared insolvent and its official now as the notification has come. Thus the bad debts expense has been recognised for it. The outstanding balance of Lowdown was $ 5400 which has been written off. The accrued income is $ 75. Company has provided loan to the shareholders amounting to $ 7500. Now interest at a rate of 1% on this amount will be received by the company. The company has not yet received this amount but it has been due, hence it is shown as accrued income. This is a month end adjustment.
The inventory asset is maintained automatically by the Quick Books software and the cost of goods is automatically calculated by the software. Company has paid $ 1200 for advertising for the period of Jan to April 2015. Out of this $ 1200, Jan month expense is $ 300 and remaining $ 900 has been treated as prepaid advertising expense. The prepaid expense is a current assets item.
The total of the current assets for the company is $ 62,032, while the total of the current liabilities of the company is $ 37,150. The calculation of the current ratio of the company can be done as under.
Current ratio = Current assets / Current liabilities
Current ratio = $ 62,032 / $ 37,150 = 1.67
The current ratio of the company is 1.67; this indicates that there are enough current assets in the company to replay its current liabilities.
During the month, company has paid a portion of its long term liabilities i.e. mortgage loan. Company also issued 4000 equity shares during the month. Company has earned a profit of $ 1277 during the month of January.
The total sales during the year were $ 37700, out of which $ 3700 was cash sales. The cost of goods sold was automatically by the Quick Books software. During the month company has paid insurance premium, interest expense, stationery expense, and wages. However at the month and entries were done for accounting fees, advertising expense, bad debts, depreciation and motor vehicle expense. It is recommended that the company should use advance functions of the Quick Books such at Payroll functions to track the wages payment.
The company is earning good accounting profit. However I also looked at the cash flow statement repots and it was showing a negative cash flow. The net cash decrease for the period was - $ 10043. Thus the management should focus on earning the cash profit also, otherwise it will not be possible to survive in the business.