Recording Business Transactions

b) Balance the accounts and bring down an opening balance:

T-Accounts

General Ledger of Bill

Cash

Bank

Owner's Equity

Purchase account

Bill(Creditor) Account

Office Furniture

Sales

Rent expenses

Stationery Expenses

Office Equipment

Debtor (Bill and Rob) Account

Vehicle

Wage expense

Withdrawal

c) Extract a Trial balance as at 30th September 2019

Mel Companies Trading Trial balance as at Sept 30, 2019

d) Prepare an Income Statement for the period ended 30^th September 2019

Mel

Income Statement

For the year ended 30^th September 2019

E) Prepare a Statement of Financial Position as at 30^th September 2019

Mel

Financial Position

30^th September 2019

Part B

1) Calculating the ratios for Mel

1. a) Net profit margin:

= *100

= *100

= 23.33%

1. b) Gross profit margin:

= *100

= *100

= 70%

1. c) Current ratio:

=

=

= 8.4:1

1. d) Acid test ratio

=

=*100

= 7.4:1

1. e) Accounts receivable collection period

=

= *365 = 109.5 Days

1. f) Accounts payable payment period

=

=

= 130.36 Days

2. Analysis of the performance based on the ratios

Net profit margin:

It simply dictates the probability of a firm. This ratio interprets revenue or sales of a firm in respect to its net profit. Hence, the extent of contribution of revenue to net profit can be easily estimated from this ratio. This ratio of Mel indicates that Mel is able to achieve 23.3% profit only from sales out of the net profit recorded for Mel. Moreover, she is also doing pretty much good than her competitor as her competitor is able to make only 16% profit from its sales. As a result, Mel’s business is more profitable than that of her competitors (Larson, Kalagnanam and Jensen, 2007).

Gross profit margin:

Another layer of profitability is gross margin which can be found by dividing the gross profit by the sales. It is efficient because it tells what is the remaining portion of sales after cost of goods production which will be used for further operational cost of a firm. Mel’s gross profit margin is 70% meaning that only 30% of the sales is the cost of production. This is also an indication that she can manufacture her goods in a cheaper process. On the other hand, her competitor can do it by having 65% gross profit margin which is lower than that of Mel’s. So, the cost of production for Mel’s business is lower than that of her competitors and Mel obviously will have more cash flow from gross profit margin than her competitors which can fuel further operation function more smoothly for Mel (Kimmel, Weygandt and Kieso, 2010).

Current ratio:

The name implies that it deals with the current portion of assets and liabilities. It can be calculated by dividing the total current assets by the total current liabilities. Current ratio indicates whether a firm is able to write off the current liabilities with its current assets, thereby measuring the liquidity level of a firm. Mel has an outstanding level of liquidity i.e. they have current assets equal to 8 times of its current liabilities. Although her competitor also has sufficient level of current assets to pay off its short-matured obligations, it is almost half level lower than Mel’s business (Williams, Haka and Bettner, 2017)

Acid test ratio:

It makes the liquidity level measurement more perfect because it subtracts comparably higher illiquid items like inventory and includes only the most liquid assets like cash. It is more logical as any current obligations can be easily paid off by these liquid assets (Lerner, Gokarn and Lerner, 2009). Also, in this ratio, Mel is in a very good position as she has more than standard level of acid liquidity. As her competitors have lower level of acid liquidity than her, she will obviously some competitive advantage over her competitors.

Accounts receivable collection period:

This ratio shows the average day it takes for a firm to collect its account receivables. The higher this ratio, the more probability that receivables will be realized later. It takes almost 110 days for Mel to collect from its receivables while her competitors need only 100 days for the same purpose. Although customer reputation for Mel will be higher compared to her competitor, she will not be in a better liquidity position to pay off its operational expenses (Horngren and Harrison, 2007).

Accounts payable period:

This indicates average time a firm takes to pay off its payables. If a firm can delay its payment, it can use the cashflow more for other operational purposes. So, higher account payable period is actually good for good cash conversion cycle. Mel is in an advantageous position because whereas her competitors are paying its payable after 100 days later, Mel is paying after 130 days. As a result, he can utilize the unpaid portion for more productive purposes and can gear up her production facilities. But he also should be careful whether excessive delay doesn’t result into bad reputation (Gaffikin, 2003).

Conclusion

Like every other activity, accounting has also some specific purposes. From the very beginning like recording, classifying, matching and reporting an accountant has to keep in the mind that the resulting report is meant for some individuals including investors, auditors, corporations, tax companies and above all govt. All of these respective parties will go through the financial statements to take their desired decisions. Hence, it is very much important to prepare financial statements carefully so that the concerned parties may use the statements reliably. Finally, recording, classifying, matching and preparing financial statements should be in a way so that every material and relevant transactions are compiled properly.

References

Azmat, N., Lymer, A. and Campbell, I. (2015). Basic Accounting. London: Hodder & Stoughton.

Basic accounting I. (2012). London: BPP Learning Media Ltd.

Clarke, E. (2005). Accounting. South Melbourne: Nelson Australia.

Gaffikin, M. (2003). Principles of accounting. Frenchs Forest, NSW: Pearson, Custom Pub.

Hill, J. (n.d.). Colloidal Silver Medical Uses, Toxicology & Manufacture.

Horngren, C. and Harrison, W. (2007). Accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.

Horngren, C. and Harrison, W. (2015). Accounting BSB110 (Custom Edition). Melbourne: P. Ed Custom Books.

Kimmel, P., Weygandt, J. and Kieso, D. (2010). Accounting. Hoboken, N.J.: Wiley.

Larson, K., Kalagnanam, S. and Jensen, T. (2007). Fundamental accounting principles. Toronto: McGraw-Hill Ryerson.

Lerner, J., Gokarn, R. and Lerner, J. (2009). Schaum's Outline of Bookkeeping and Accounting (4th Edition). New York, USA: McGraw-Hill Professional Publishing.

Media, B. (2011). FIA - Maintaining Financial Records - FA2. London: BPP Learning Media.

Media, B. (2011). FIA - Recording Financial Transactions - FA1. London: BPP Learning Media.

Warren, C., Reeve, J. and Duchac, J. (n.d.). Accounting.

Williams, J., Haka, S. and Bettner, M. (2017). Financial Accounting. NY: McGraw-Hill Higher Education.