Financial and management accounting sample

Financial and management accounting sample

PART A

1. General journal entries

2. Trial balance

3. Validate the case for completing the adjusting entries.

When making entries into the journal, two or more accounts are affected. One of the accounts is debited while the other is credited. The knowledge about accounts to be debited and ones to be credited is based on the financial accounting principles and concepts accompanying each transaction. Any transaction that results to an increase in assets, expenses and drawings, amounts involved are taken onto the debit side of general journal and individual accounts are debited with the same amount. For instance, on August 7, Nancy Bolton spent $3000 in purchasing office supplies. In this case, office supplies account is debited, again the same amount is recorded in the general journal on the debit side denoted by cash. On the same, cash account is credited with the same amount and an entry is made in the general journal on the credit side described by office supplies.

Increase in revenues is debited while decrease is credited. For instance on 8 August, Nance Bolton received $8500 dollars from Ken Rose, a debtor. In this case, cash increases and the amount owed by Ken Rose decreases. Two accounts will be created, cash and Ken Rose accounts. Cash account is debited while Ken Rose is credited. When salaries are paid, expenses increase and increase in any expense is debited. For instance on August 31, the general journal should be debited by salaries account and credited with cash account but with the same amounts.

Journalization is the first step in the accounting cycle. It contains information required in the preparation of final financial statements such as the balanced sheet and the income statement. Preparation of financial reports requires information from the final financial statements. Therefore, it is clearly true to say that adjusting entries may delay financial reports they contain relevant information from which the reports are prepared.

PART B

1. General journal
2. Adjusted Trial Balance

PART C

1. Income statement

2. Norman Brook’s Balance sheet

3. Norman’s Brook statement of changes in Equity

4. The difference between Sole Trader and a limited company

In sole trader, the owner is the same as business while in limited company, the owner is different from the company (business and the owner are two different legal entities) (Gazur, & Goff, 1990). In some other cases, in sole proprietorship, the owner is the business while in limited company, the member of the company is just a simple shareholder. In cases of losses, one can offset trading losses, against other incomes and amount of relief that one may claim for losses and interest payments while on the limited company can offset its trading losses against other company’s income but not limited to individual income. On the profit extraction in the sole trader, one may withdraw money from the business without any tax effect while on limited company, income withdrawn from the company is taxable (Gazur, & Goff, 1990). Company’s distributions are taxed as dividends and earnings earning are subjected under PAYE and NICS subjects. In terms of borrowing, business is free to borrow from the business bank account, since it is from within owner’s account while in limited company, directors are free to borrow either from Owners Company. Limits are set by Company’s Act 2006.

There are effects of dividends payments by company tends to lower company’s profits margin, assets in terms of capital by cash withdrawal and equity. The sole trader cash withdrawal from a business lowers capital in the business hence assets decrease. This may also affect capital profits generation. Less capital lowers profit generation and in turn lowers business equity (Gazur, & Goff, 1990). It is not possible for a company to borrow funds which would be used to pay dividends. Dividends are usually generated from company’s generated profits but not from external borrowings. This is simply because borrowing such funds would result to increasing company’s liabilities.

PART D

1. $ Income Statement and Balance Sheet

Calculations

3. Merger Court financial position and performance

Introduction

Financial ratios indicate the financial position and performance of firms. They are calculated using information from final financial statements such as balance sheet and the income statement. They are used by the managers for comparison purposes and to make future decisions.

Current ratio

It is used to measure firm’s ability to pay both long term and short term obligations. If the ratio is high, the company is in a position to pay its obligations and vice versa. There is a notable improvement in the performance of Merge Court limited from 2015 to 2016. The current ratio in 2015 was 0.72044 and in 2016 is 0.742483. This means that Merge Court Limited is in a better position to pay its debts as compared to 2015.

Return on ordinary equity

It is used to measure the amount of profit a corporation is in a position to make with the money invested by shareholders. It is used by investors to compare profitability with those of other firms. There is a mark able drop of return on ordinary equity ratio in Merger Court Limited between 2015 and 2016. This means that shareholders of Merger Court should increase their investment reserves with the company in order to generate a high profit.

Return on Assets

Firms use this financial ratio to determine how the management is efficient to generate profit using the available assets.  A higher value will always indicate the efficiency of management to allocate its resources (Giordani et al, 2014). The trend in Merger Court indicates that the company has not been in a better position to convert its investment into earnings in 2016 as compared to 2015. The investors should either increase their investments or use efficient management to make wise choices in making financial decisions.

Debt ratio

This ratio is used to measure the extent of company’s leverage. If the ratio is high, definitely, the company is in a financial risk. Debt ratio of Merger Court Limited indicates that the company’s liabilities have exceeded the total assets in both years. The company should either reduce borrowing or use other financial tools to boost assets and reduce liabilities.

Profit margin before tax

This ratio measures profitability of a company. The greater the value, the higher the company is profitable. The pretax profit margin of Merger Court Limited has been declining from 2015 t0 2016. This means that the company generated a relatively greater profit in 2015 as compared to 2016. The company should set strategies on how to improve sales or grow profit through cost saving.

Conclusion

Comparatively, financial ratio data indicate that Merger Court performance was better in 2015 than 2016. There poor management efficiency in making decisions, a decrease in profit and a low capability of making profit between the two years.  The managers of the company should set strategies on how to increase total earnings and reduce liabilities in order to record an improvement in performance of the company in the years to come.

References

Giordani, P., Jacobson, T., von Schedvin, E., & Villani, M. (2014). Taking the twists into account:           Predicting firm bankruptcy risk with splines of financial ratios. Journal of Financial and         Quantitative Analysis, 49(04), 1071-1099.

Gazur, W. M., & Goff, N. M. (1990). Assessing the Limited Liability Company. Case W. Res. L. Rev., 41, 387.