Evaluate the revised profitability of Sizbiz, given that the industry average percentages are 48% for Gross Profit

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Communication of ideas, report structure and referencing

 

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Assignment Brief

The unqualified accountant of Sizbiz Trading, Fife Le Bonbon has produced a set of financial statements for the year ended 30 June 2015. These are contained in the excel file “Assignment 1 Appendix Ain the Material for Assignment 1 folder. The Managing Director of Sizbiz, Mr Fred Wardo thinks the statements are overly optimistic but, as he doesn’t know much about Accounting, he asks you to go through the financial records and see if the statements do make sense.

After a thorough examination of the financial records, you have come across the following anomalies:

a)The annual insurance premium paid was $36,000 for the year ended 31 August 2015 so two months ($6,000) are prepaid, but this hasn’t been adjusted for.

 

b)Mr Wardo is a vintage car enthusiast and his personal 1955 Buick was restored by Classic Carers. Sizbiz paid $9,000 to Classic Carers and Fifi entered the amount as Vehicle Expenses. Fifi says Mr Wardo works so hard that he deserves some reward.

 

c)You are surprised to see Frowd Enterprises on the list of Accounts Receivable as at 30 June 2015 with a balance of $21,000. Frowd Enterprises achieved a lot of publicity in March 2015 when Mr Frowd went missing and the company was declared bankrupt. Unsecured creditors (of which Sizbiz is one) were told they would receive nothing. When you ask Fifi about this, she says she is an optimist and who knows, Interpol may catch up with Mr Frowd and make him pay the money back.

 

d)When you ask why the depreciation expense has dropped significantly,Fifi explains that no depreciation expense was charged on “Equipment” this year. Unlike cars and furniture which are bought on the open market, the equipment is specialised and replacing it would cost a lot of money. (The equipment originally cost $110,000 with an estimated useful life of five years and a residual value of $10,000. Sizbiz uses the straight line method of depreciation.)

 

e)Sizbiz operates the periodic inventory system.A shipment of widgets which cost $32,000 was received into the warehouse at Sizbiz on 25 June (and was included in the stock count). As yet no payment has been made for this shipment nor has an invoice been received. When you question Fifi on this, she says “don’t worry about it. We will pay it when the invoice is received but I have decided to ignore it till then so there won’t be pressure on our cash flow”.

 

Required:

1.For the points a) to e) above, on the financial statements inthe Excel file “Assignment 1 Appendix A”, make the required adjustments in the column “Adjustments” and then enter the revised amounts in the “Revised” column. An example has been entered for you. An invoice for advertising incurred prior to 20 June 2015 was not entered. To correct this, Advertising expense has been increased by $5,000 and Accounts Payable has also been increased by $5,000.

If there is no adjustment required, simply enter the original amount in the “Revised” column so that you may complete the revised financial statements.

 

2.Prepare a report for Mr Fred Wardo following the structure outlined in the Assessment Guide.

i)For each of the adjustments a) to e) explain why you have made them and justify your adjustment by reference to basic accounting concepts and generally accepted accounting practices. Each of the adjustments should be used as a heading in your report.

 

ii)Evaluate the revised profitability of Sizbiz, given that the industry average percentages are 48% for Gross Profit and 8% for Net Profit. Head this“Evaluation of Profitability”.

 

3.Written Communication:

Communication of ideas, report structure and referencing.

 

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