Financial management 2 assessment 2 Essay Example

ASSESSMENT 2: PART A-MULTIPLE CHOICE

			Balance sheet and Profit or loss statement (A&B)		Income statement (A)
	False (B)		Debit the asset (computer) account and credit the asset (bank) account. (C)		Balance sheet (B)
			Financial Management (A)		Net Asset (C)
	Fixed Assets (C)		Cheque butts (D)		Operating Activities (A)
	False (B)		All of Above (E)		Net loss of $50,000 (D)
			Selling Idle Assets (A)		Make profit (B)
	Do all of the above (D)		Sales Budget (A)		Financial records (A)
	False (B)		Realistic expectation (B)		1 July to 30 June
	False (B)		Do all of above (D)		$1,043 (A)
			Net profit (A)		Unfavourable (Downwards) (B)

Assessment 2: Part B- Written or Oral Questions

Question 1a. Project appraisal

The rationale for choosing the best decision on how to allocate the profit for the next financial year depends on two factors. First, the value addition in the form of profit and secondly the impact of the change to existing and potential customers. The calculation below shows the profit increase for each suggestion;

Sisters suggestion

The sister suggests that redecorating would attract a 20% rise in prices. Therefore, the effect on profit after tax is as shown;

Assume tax rate = 27.5%

Increased sales revenue = 160, 000*1.2 = 192,000

Cost of the current year = 160,000 -20,000= 140,000

Profit for next financial year = 192,000-140,000=52,000

But 140,000 has taxation amount for the current gross profit. Therefore, the 20,000 net profit is taxed.

Untaxed profit = 52,000 – 20,000

Net profit after redecorating = 32,000 (1-0.275) + 20,000

= $43,200

Brother’s Suggestion

The purchase of wood fire oven will not affect the prices of the current menu, so the profit will remain 20,000 for the current menu. However, the restaurant will introduce a new product of take away pizza. The calculation below shows the effect on restaurant’s net profit;

Gross profit per pizza = 15 – 4.5

Net profit per pizza = 10.5(1-0.275)

Therefore, net profit from take away pizza per year is;

= 7.6125 * 150 *12

= $13,702.5

Total profit for next year = 13,702.5 + 20,000

= $33,702.5

Decision:

The evaluation of change in net profit shows that sister’s suggestion to redecorate and hike prices by 20% will boost net profits higher (by 23,200) compared to purchasing wood (by 13,702.5). Also, the sister’s suggestion will payback within the first year while purchasing of wood fire oven would take more than a year to payback. However, the decision is subject to the price sensitivity of the consumer since it might lead to the decline of the current demand. For that case, brother’s suggestion would be appropriate, but for our analysis, we assume that consumers are not price sensitive and thus we invest the net profit in redecorating the restaurant.

Question 1b: Further consultation

The employees of the restaurant play a major role in deciding whether to redecorate or purchasing the wood fire oven. The employees have constant touch with the product and customers. The consultation will include getting the reaction from the two suggestion and ask them general comments they get from the customers. For example, what is the perception that the clients get regarding interior design of the restaurant and customers’ perception about the current prices. It will be illogical to increase prices when customers are of the view that the current prices are high. It, therefore, takes us to the point mentioned above that for the case where consumers are price sensitive, it is important not to redecorate and invest on wood fire oven since it will introduce a new product without changing the prices. However, it is important to determine the demand for the pizza by asking employees the approximate number of customers who inquire about take away pizza. Also, it is important to ask if employees if customers complain or compliments our products in comparison with competitors’.

Question 1c: Records kept for redecoration

Redecoration cost falls under repairs and maintenance account which is treated as an expense. The exemption of being treated as expense comes in where the restaurant undergoes total reconstruction. Therefore, the amount will be debited in maintenance and repairs account and debited in profit and loss account as an allowable expense.

Question 2: Importance of budgeting in an organisation

The budgeting process entails planning the available financial resource to achieve operational and financial goals of the organisation in a given period. The budgeting process is important for an organisation in the following ways;

• It creates a formal coordination of activities within different departments in an organisation and aligning them towards achieving company’s strategic goals.

• It improves company’s process of performance evaluation since they can compare the predetermined (budgeted) and actual performance.

• Moreover, the proper evaluation means that the company can correct deviation appropriately and achieve a greater efficiency. It acts a control tool.

• Also, the budgets help in matching demand and supply to avoid shortages that might impact on company’s profitability (Stock shortages and overstocking).

• It assists in appraising the management performance since budgets act as a goal that needs to be achieved within a determined period.

Question 3: Financial reporting period

The first day of reporting is 1st July of every and the last day is 30th June of every year.

Question 3a: Effect of financial year to budget preparation

The difference between fiscal and calendar year-end impacts comparative analysis between the budget and actual performance. For example, budgets are prepared and evaluated using calendar year and actual performance is prepared using fiscal year results. Therefore, the comparison becomes difficult.

Question 4a: Technological recommendation

I would recommend that the owner purchases affordable enterprise resource planning (ERP) that will help in recording sales, purchases and expenses. The ERP can produce uniform and comprehensive output such as financial statements and budgets at a click of a computer button.

Question 4b: Software recommendation

I would recommend QuickBooks or MYOB since they are affordable and easy to learn.

Question 4c: Advantages of using software for developing and monitoring budgets in comparison to manual records

• As mentioned above, the difference in fiscal and calendar year-end impacted comparison analysis of budgeted and actual performance. The software overcome this challenge since one can compare budgeted and actual performance at any time since the statements are automatically generated.

• The software enables the user to track inventory demand and thus assists in making inventory budgets. It also shows the season of low and high demand thus reducing shortages or overstocking. Estimating demand and supply in different seasons is difficult with manual system.

• Also, it helps in forecasting future financial needs of the company and the period it falls due thus enabling the owner to plan how to settle the obligation in time, compared to a manual system that depends on human memory and manual records.

• The software keeps records of a long period and comparison can be easily done for a longer span within a short period compared with a manual which requires one to look into records of years under study.

Question 5a: Variance and its classification

Financial year	Budgeted		Variance(Actual-Budgeted)	Unfavourable/Favourable
2007/2008	$350,000	$290,000	($60,000)	Unfavourable
2008/2009	$400,000	$250,000	($150,000)	Unfavourable

Question 5b: Events that led to above variance and how to manage it

The increased competition- It is possible that other competitors are in the same market and are performing better. The decrease in sales for 2008/2009 shows that the competitors are eating into ABC’s existing market. The solution is to find out what competitors are doing different and introduce competitive products such as online purchase and delivery to customer’s location.

Poor marketing and management strategies- ABC’s marketing strategies can negatively affect the sales and thus fail to reach budget goals since the competitors are gaining its market or not convincing new customers to consume its Pizza. Also, the business failed to reach estimated amount in the first year, but management had guts to increase its budgeted sales for the next year, which is an inefficiency for management. It is therefore prudent for ABC to increase its marketing on media such as billboards, mainstream media or social media and evaluate the management competency. However, the management should evaluate the cost effectiveness of the marketing strategy to maximise profit.

Business location- The location can affect sales and thus failed to meet the target. ABC should evaluate if the business is in a strategic location with high human traffic and visibility of its name from a distance to capture the eye of a potential customer. If the location is inappropriate, the management needs to consider moving to a strategic place or else the sales will keep dropping.

Question 6a: Legal implication

It is a legal obligation of a business to keep all its financial records for tax purposes. The invoice acts as a source of original entry and business has the burden of proof in case the tax authority wants to audit the supplier if he is remitting the right VAT and business if it reports correct profit before tax. It is important to keep all business records for at least three after payment of the fiscal year-end. The failure to comply with maintenance of proper financial records would lead to revocation of trading licence, imprisonment, fine or both.

Question 6b: How to improve beverage budgeting

The demand for beverage products are adversely affected by seasons for example during cold weather certain beverages such as juice and soft drinks have low demand, but high move faster during hot weather. It is therefore difficult to forecast the demand in a given season if the owner does not keep proper records or lacks management information system (MIS). It is prudent for the proprietor to forecast sales basing on the demand of the same period the previous year. The use of enterprise resource planning (ERP) makes it easier for the owner to budget for each season accurately. Also, the owner should have a proper safety stock to reduce the impact of delay of restocking or unexpected demand. The economic order quantity (EOQ) would be a good tool for the owner since it enables him to determine a cost effective level of stock. The EOQ determines the optimum level of stock that minimises ordering and holding the cost of the beverage.

Reference:

Horngren, Charles T. Introduction to Financial Accounting. Harlow: Pearson Education, 2014. Print.

Lanen, William N et al. Cost Accounting. New York, Mcgraw-Hill Higher Education, 2010,.