Discussion about decision making of accounting for business

Questions: 1. Decision Making Mario has been on an extreme fishing holiday in South Africa and has come back to Australia keen to start up a fishing charter company on the Yorke Peninsula. He is looking to make as much profit as possible, while working for himself and doing something he really loves. Mario doesnt think that it will provide a stable income throughout the year so in addition to the fishing charter business he is also considering running an online business selling fishing rods.. After spending a great deal of his savings on his fantastic extreme fishing holiday in South Africa he only has $70,000 left and $50,000 of this will be used to set up his fishing charter business. The remaining amount he will use to set up his online business selling fishing rods with any money left over to be deposited in a bank account yielding 6% per annum. On chatting with a friend of his who also runs an online business he has determined that he is going to have to spend $4,500 to set up his website and invest a further $5,000 in fishing rod inventory. Mario will attend caravan and camping events to promote both of his businesses. After considerable research Mario has determined that he wants to sell two types of fishing rods. He wants to stock one fishing rod suitable for big game fishing in deep waters from a boat and one light weight fishing rod suitable for fishing from a beach. Mario will sell each fishing rod as a complete package, with each package consisting of three parts - a fishing rod, a reel and fishing line. Mario has undertaken some market research and has decided on the Big Game Shimaro fishing rod for big game fishing but has not yet decided on which of two possible light weight beach fishing rods he is going to sell. He has made the following estimates regarding the costs associated with each fishing rod: Big Game Fishing Rods: Big Game Shimaro Components Cost per Fishing Rod ($) Fishing Rods 54 Reel 95 Fishing Line 15 Light Weight Beach Fishing Rods: Light Game Rovex Light Game Okuma Components Cost per Fishing Rod ($) Cost per Fishing Rod ($) Fishing Rods 32 20 Reel 30 28 Fishing Line 7 7 Mario has investigated how much these fishing rods are being sold for online by other retailers as well as how much they are being sold for in a shop front retail outlet. He also chats regularly online with various fishing enthusiast groups and has gathered a great deal of information about what prices people are willing to pay for various fishing rods. Mario has determine that he could sell the Big Game Shimaro for $328, the Light Game Rovex for $189 and the Light Game Okuma for $250. Mario has estimated that the Big Game Shimaro has a 45% chance of selling 450 fishing rods per month and a 55% chance of selling 300 fishing rods per month. In addition he has estimated that if he purchases the Light Game Rovex fishing rod he has a 68% chance of selling 500 fishing rods and a 32% chance of selling 250 fishing rods per month. Alternatively if he purchases the Light Game Okuma fishing rod he has a 70% chance of selling 466 fishing rods and a 30% chance of selling 280 fishing rods per month. After discussing his plan to set up an online fishing rod business with the fishing rod manufacturer, the manufacturer offered the following bonus of free Big Game Shimaro fishing rods if the total quantity of fishing rods (Big Game Shimaro and Light weight beach fishing rods) ordered exceeds a certain quantity in a month (as detailed in the table below). The estimated quantities calculated using the probabilities above will be used to determine the number of free bonus fishing rods. These fishing rods can be sold for the full retail price of $328. Quantity of Order Number of free Bonus fishing rods 775 1 780 2 785 3 790 4 795 5 800 6 805 7 Required: Using the decision making model studied in topic 1 of this unit, explain which overall combination of fishing rods Mario should purchase. Ignore taxation in your advice. Please use the headings below to structure your answer. Show all calculations. 2. Journal entries, posting to ledger and trial balance The following transactions were recorded in the journal of the Crazy Cuts hairdressing salon owned by George during the first month of operations ending 30st June 2014 (ignore GST). June 1 George commenced business by opening up a bank account for the business using $32,000 of his own money. June 3 The business purchased $7,500 worth of shop fittings paying $2,000 with a short-term loan and the balance from the business cash account. June 6 Performed $860 worth of haircuts for cash and $120 worth of haircuts on credit. June 9 George took his wife to dinner and paid $90 from his personal bank account. June 11 Received $120 from customer for the haircut on credit on the 6th June. June 30 Electricity expense of $150 was paid by writing a cheque from the business bank account. Required: (Proformas attached)A) Prepare a journal entry to record each transaction. Ensure all entries are complete and correctly formatted including a narration (explanation) for each journal entry. The general journal of Clean as a Whistle, Window Cleaner, contained the entries below for the month of March 2014. Date Accounts Debit Credit 2014 $ $ March 1 Cash at Bank 5 200 Andy Whistle, Capital 5 200 (Cash invested by owner) 9 Fuel Expense 85 Cash at Bank 85 (fuel for business van) 16 Cash at Bank 1 000 Window Cleaning Revenue 1 000 (paid cash for cleaning clients windows) 22 Supplies 200 Accounts Payable 200 (purchased cleaning clothes and cleaning fluid on credit) 31 Accounts Receivable 180 Window Cleaning Revenue 180 (client windows washed on credit) B) Post the journal entries provided above to the ledger T accounts provided in the assignment template. Accounts with more than one entry must be footed. C)Prepare a trial balance as at 31 March 2014.D) For the journal dated 9th of March 2014, use the relevant element definitions introduced in topic 2 to explain why each of the accounts have been debited and credited. General Ledger Cash at Bank Date Item $ Date Item $ Accounts Receivable Date Item $ Date Item $ Supplies Date Item $ Date Item $ Accounts Payable Date Item $ Date Item $ Andy Whistle Capital Date Item $ Date Item $ Window Cleaning Revenue Date Item $ Date Item $ Fuel Expense Date Item $ Date Item $ _________________________ Trial balance ---------------------------------- Account Title Debit Credit A) Income Statement for the period.B) Statement of Changes in Equity for the period.C) Balance Sheet in the narrative format. 3. Preparing financial statements Sophie Fairchild decided to open Sophies Superb Curtain Making Shop on 1 March 2014. She contributed for this purpose office equipment $10 000 and a commercial van $22 000, and deposited $10 000 cash in a business bank account. On the 31st March Sophie was able to determine the following account balances and has listed them below in no particular order. Account Balance at 31st March Accounts Payable $ 500 Rent expense $ 500 Cash at Bank $ 9 260 Electricity expense $ 90 Office Equipment $ 10 000 S Fairchild, Capital $ 42 000 Office Supplies $ 620 Loan Payable $ 2 880 Accounts Receivable $ 1 820 Fuel expense $ 100 Commercial Vehicles $ 22 000 Office supplies expense $ 400 Sewing Machine $ 3 680 Wages expense $ 1 400 Drawings $ 200 Postage expense $ 20 Curtain Making revenue $ 4 710 Required: Prepare the following financial statements. Please ensure that all statements are correctly formatted. Answers: 1. Decision Making Step 1 of the Decision Making Process According to Collis, Holt Hussey (2012), the first step of a decision making process is Problem recognition. The need for a decision occurs when the decision maker realizes the problem faced. In this question Mario is facing problem determining the purchase decision of fishing rods. Since he has so many combinations of fishing rods with varying costs and varying profits hence he is confused as to which one should be purchase. Step 2 and 3 of the Decision Making Process The second and third stage of decision making process includes Information search and evaluation of alternatives (Power, 2010). Gathering of the relevant information helps in evaluation of the various alternatives and make a final decision. Mario in this case undertook suitable research and about the various types of fishing rods and the costs related to those rods. This has offered him with four choices namely Big game Shimaro rod, Light Game Rovex rod and Light Game Okuma rod. Big Game Shimaro calculation Suppose 450 fishing rods are sold per month Cost price of 450 rods (54+95+15) 164 * 450 = 73800 Sale price at 328 328 * 450 = 147600 Total profit 73800 Suppose 300 fishing rods are sold per month Cost price of 300 rods 164 *300 = 49200 Sale price at 328 300 * 328 = 98400 Profit 49200 Light Game Rovex calculation Suppose 500 rods are sold Cost price of 500 rods (32+30+7) 69 * 500 = 34500 Sales price of 500 rods 189 * 500= 94500 Profit 60000 Suppose 250 rods are sold Cost price of 250 rods (32+30+7) 69* 250 = 17250 Sales price of 250 rods 189 * 250 = 47250 Profit 300000 Light Game Okuma calculation Suppose 466 rods are sold Cost price of 466 rods (20+28+7) 55 * 466 = 25630 Sales price of 466 rods 250 * 466 = 116500 Profit 90870 Suppose 280 rods are sold Cost price of 280 rods (20+28+7) 55* 280 = 15400 Sales price of 280 rods 280 * 250 = 70000 Profit 54600 Calculation of profitability using probability percentage Average month selling of Big game Simaro : 0.45 * 450 + 0.55 * 300 = 367.5 Average month selling of Little game rovex: .68 * 500 + .32 * 250 = 420 Average month selling of light game okuma : .70 * 466 + .30* 388 = 442.6 Average month profit of Big game Simaro : 367.5 * 328 = 120540 Average month profit of little game rovex: 420 * 189 = 79380 Average month profit of light game Okuma: 442.6 * 250 = 110650 From this calculation it can be stated that the combination of Big game Simaro with the Light game okuma will yield more profit than the other combination so Mario should opt for this profitable combination. Allocation of Bonus Rods: Light Game Rovex Since the total probability of items sold is around (500+ 250) = 750 rods hence the following chart shows the allocation of bonus rods Quantity of order Number of free bonus fishing rods 775 1 780 2 785 3 790 4 795 5 800 6 805 7 Allocation of Bonus Rods: Light Game Okuma Since the total probability of items sold is around (466+280) = 746 rods hence the following chart shows the allocation of bonus rods Quantity of order Number of free bonus fishing rods 770 1 775 2 780 3 785 4 790 5 795 6 800 7 Bank Interest calculation Savings 70000 Fishing charter business set cost 50000 Money left 20000 Online business setting expenses (4500 + 5000) = 9500 Remaining amount 10500 Mario will deposit $10500 amount in bank for against a yearly interest of 6%. Hence the yearly interest will amount to around 10500 * 6% = $ 630 per annum Combine all profit streams In case Mario is taking combination of Big Game Simaro with Light Game Rovex the total profit will be: Interest income 630 Average profit of Big Game Simaro 120540 Average profit of Light Game Rovex 79380 Profit 200550 In case Mario is taking combination of Big Game Simaro with Light Game Okuma the total profit will be: Interest income 630 Average profit from Big Game Simaro 120540 Average profit from Light game okuma 110650 Profit 231820 The total profit combination shows that the second option is better than the first option. 2 A. Journal Entries, Posting To Ledger And Trial Balance In the books of Crazy Cuts Journal account for the month ended 30th June 2014 Date Accounts Debit ($) Credit ($) June 1 Bank account Dr To Capital account [Being started business by opening up of a bank account] 32,000 32,000 June 3 Purchase account Dr To Short term loan account To cash account [Being purchased shop fittings paying 2000 with a short term loan and paying the balance from business cash account] 7500 2000 5500 June 6 Hair cut sales account Dr To cash To Debtors [Being performed haircuts for cash and credit] 980 860 120 June 9 Dinner expenses account Dr To Bank account [Being paid dinner expenses of wife from personal bank account] 90 90 June 11 Debtors account Dr To Hair cut sales account [Being received the credit amount form the customer] 120 120 June 30 Electricity expenses account Dr To Bank account [Being paid electricity expenses through bank account] 150 150 In the books of Crazy Cuts Ledger accounts for the year ended 30th June 2014 Cash account Dr Cr Date Particulars amount Date Particulars Amount 3-Jun By purcahse 5500 6-Jun By Hair cut sales 860 6360 30-Jun To bal c/d 6360 6360 6360 1-Jul By bal b/d 6360 Capital account Dr Cr Date Particulars Amount Date Particulars Amount 1-Jun By Bank 32000 30-Jun To bal c/d 32000 32000 32000 1-Jul By bal b/d 32000 Bank account Dr Cr Date Particulars Amount Date Particulars Amount 1-Jun To capital 32000 9-Jun By dinner expenses 90 30-Jun By electricity expenses 150 30-Jun By bal c/d 31760 32000 32000 To bal b/d 31760 Dinner expenses account Dr Cr Date Particulars Amount Date Particulars Amount 9-Jun To bank account 90 30-Jun By bal c/d 90 90 90 1-Jul To bal b/d 90 Debtors account Dr Cr Date Particulars amount Date Particulars Amount 6-Jun To hair cut services 120 11-Jun By cash 120 120 120 Purchase account Dr Cr Date Particulars Amount Date Particulars Amount 3-Jun To short term loan 2000 To cash 5500 30-Jun by bal c/d 7500 7500 7500 1-Jul To bal b/d 7500 Short term loan Dr Cr Date Particulars Amount Date Particulars Amount 30-Jun To bal c/d 2000 3-Jun By purchase 2000 2000 2000 1-Jul By bal b/d 2000 Hair cut services account Dr Cr Date Particulars Amount Date Particulars Amount 6-Jun To cash 860 11-Jun By debtors 120 To debtors 120 30-Jun By bal c/d 860 980 980 1-Jul To bal b/d 860 Electricity expenses account Dr Cr Date Particulars Amount Date Particulars Amount 30-Jun To Bank 150 30-Jun By bal c/d 150 150 150 1-Jul To bal b/d 150 In the books of Crazy cut Trial balance as on 30th June 2014 Sl no. Name of the account Debit ($) Credit ($) 1 Cash account 6360 2 Capital account 32000 3 Bank account 31760 4 Dinner expenses account 90 5 Purchase account 7500 6 Short term loan 2000 7 Hair cut expenses account 860 8 Electricity expenses account 150 Total 40360 40360 2 B) General Ledger In the books of Clean Ledger accounts for the month ended 31 March 2014 Cash at bank Date Item $ Date Item $ 1 March To Andy Whistle, Capital 5200 9 March By Fuel expenses 85 16 March To window cleaning revenue 1000 31 March By bal c/d 6115 6200 6200 1 April To Bal b/d 6115 Accounts Receivable Date Item $ Date Item $ 31 March To bal c/d 180 31 March By window cleaning revenue 180 180 180 1 april By bal b/d 180 Supplies Date Item $ Date Item $ 22 March To accounts payable 200 31 March By bal c/d 200 200 200 1 aprl To Bal b/d 200 Accounts Payable Date Item $ Date Item $ 31 march To bal c/d 200 22 March By supplies 200 200 200 1 april By bal b/d 200 Andy Whistle Capital Date Item $ Date Item $ 31 march To bal c/d 5200 1March By cash at bank 5200 5200 5200 1 april By bal b/d 5200 Window Cleaning Revenue Date Item $ Date Item $ 31March To bal c/d 1180 16 March By cash at bank 1000 31 March By accounts receivable 180 1180 1180 1 april By bal b/d 1180 Fuel Expense Date Item $ Date Item $ 9 March To cash at bank 85 31 march By bal c/d 85 85 85 1 April To bal b/d 85 Trial balance for the month ended 31 March 2014 Account Title Debit Credit Fuel expenses 85 Window cleaning revenue 1180 Accounts payable 200 Andy whistle capital 5200 Supplies 200 Accounts receivable 180 Cash at bank 6115 Total 6580 6580 D) The journal on 9th March shows the transaction for Cash paid from bank account for fuel expenses. In this transaction it is seen that two accounts are affected namely Fuel expenses and Cash at bank. The fuel expense account is a nominal account and cash at bank is a real account. The golden rules for both accounts are:Nominal accountDr: all expenses and lossesCr: All incomes and gainsReal accountDr: what comes in Cr: What goes out Hence keeping the rules in mind the nominal account fuel expenses are debited because it I s an expense for the business and cash at bank account is credited because the cash is going out of business for the payment of the expense (Collis et al. 2012). 3. (A) In the books of Sophie Superb Curtain Income statement for the month ended 31 March 2014 Expenses amount Amount Rent expense 500 Electricity expense 90 Postage expense 20 Office supplies expenses 400 Fuel expense 100 Office supplies 620 Wages 1400 Total expenses 3130 Income amount amount Curtain making expenses 4710 Net profit 1580 (B) Statement of changes in owners equity Sophie Superb Curtain Statement of changes in owners equity Investments during the month (Owners capital) Office equipments 10000 Commercial van 22000 Cash in a business bank 10000 42000 Add: Net profit during the year 1580 43580 Less: Withdrawals (200) Net increase in owners equity 43380 (c) Balance sheet as on 31 March 2014 Balance sheet as on 31March 2014 Assets amount amount Cash at bank 9260 Office equipment 10000 Commercial vehicles 22000 Accounts receivable 1820 Sewing machine 3680 Total assets (A) 46760 Liabilities Capital 43380 Accounts payable 500 Loan payable 2880 Total liabilities 46760 4. Application Of Element Definition According to Power (2010) unearned income or more commonly known as the passive income is a type of income that the party receives by virtue of owning a property. Some of the incomes which come under unearned income areas follow: Income earned in kind support or maintenance like food and shelter Private pensions and annuities Gifts and inheritances Prize and awards Dividends and interests Rent and royalties Alimony payments in cash and kind Payments made for security purposes like jury fees, payment to agricultural workers, tipsIn the accounting terms this kind of income is considered as deferred income which means that the revenue is already collected but not yet earned in simple words advances form customers (Barnes, (2011). Under the rules of GAAP the accounting transactions are recorded on an accrual basis that is income recorded when it is earned. Hence the unearned income cannot be recorded as revenue rather it should be recorded as a liability until the time it is actually earned. Horngren et al. (2012) In the given case Jane has received advance payment of the rent of jumping castle from the client one month before the delivery of the product. Hence it is an unearned income. Since the income has not been accrued by Jane hence it will not be recorded as revenue. The recording of the income in two ways are as follows. Suppose the advance rent amount received by Jane is $2000 then under the liability method the following recording will be done.Cash account DrTo Unearned income accountThe transaction will be recorded in the following manner in income methodCash account DrTo service Income account Reference list Books Collis, J., Holt, A., Hussey, R. (2012). Business accounting. Houndmills, Basingstoke, Hampshire: Palgrave Macmillan. Horngren, C., Harrison, W., Oliver, M. (2012). Accounting. Upper Saddle River, N.J.: Pearson Prentice Hall. Journals Barnes, P. (2011). Creative Accounting, Fraud and International Accounting Scandals. Accounting And Business Research, 41(4), 411-412. doi:10.1080/00014788.2011.610703 Power, M. (2010). Fair value accounting, financial economics and the transformation of reliability. Accounting And Business Research, 40(3), 197-210. doi:10.1080/00014788.2010.9663394 Zeff, S. (2010). The Routledge Companion to Accounting History. Accounting, Business Financial History, 20(1), 107-112. doi:10.1080/09585200903504298