Applied Financial Accounting The Routledge Companion

Question: Discuss about theApplied Financial Accountingfor the Routledge Companion. Answer: Overview: The current report entails the preparation of the different financial statements of an organisation based on the transactions made in July-December. The current budget is prepared for the period of January-June by taking into consideration the transactions made in the above-specified period. Income Statement: It has been obtained that the contract revenue of the organisation will increase by 10% each month and the same rate is maintained while deriving revenue from other income. The cost of sales is also expected to increase at the same rate like revenue with increase in the production capacity. As a result, the gross margin of the organisation will be much high above 50%. The net margin of the organisation will also increase above 20% and the ratio is obtained as 47% in the month of January. The ratio is expected to increase further in the upcoming months. The probable reason behind such increase is the anticipated increase in sales revenue and the rising demand of the organisational products in the Australian market (Miihkinen 2014). Assumptions for the Balance Sheet: Debts are collected after five months from the debtors in cash Half of the sales are made in cash and the remaining account on credit Balance Sheet: In addition, the report also covers preparation of the balance sheet statement based on certain assumptions in order to maintain the desired level of assets and liabilities. It has been found that the asset base of the organisation will be much higher in contrast to the current liabilities. However, the organisation is projected to raise funds through equity over the months in order to minimise the risk. Therefore, the budget prepared depicts the following: The company is planning to maintain an equity ratio of 60% - 68% after minimising the market risk. In addition, the owners capital of the organisation will remain the same throughout the period, which is $82,800. Current ratio has been extremely high above the standard ratio of 5:1 due to increased level of inventory Acid test ratio is quite higher than 1:1, thus, depicting an over-purchase of inventory Solvency ratio is quite below 5:1, since majority of the funds will be generated from issuing equity shares. This depicts that the organisation will be relying highly on accumulating funds through issuance of equity shares and owners fund. Although, it will ensure a stable rate of return, the shareholders might not be able to earn substantial increased return on investments. Therefore, raising additional funds through debt is suggested in order to maintain the optimality of the capital structure. Cash Flow Statement: From the cash flow statement, it is evident that the cash inflows from operating activities will be negative due to increase in payroll accounts payable. This is because an organisation aims to pay the creditors for raw materials and other resources purchased on credit at the beginning of an accounting year. However, the amount is expected to increase in the upcoming months, since the organisation will focus on purchasing goods on credit to retain the working capital availability.However, the organisation is not projected to experience any cash inflow or outflow from investing or financing activities for the period of January to June 2017. As a result, cash at the end of the monthly period will increase from January over the following months. Hence, based on the above discussion, the organisation will need to cover its minimum liabilities for fall in the cash inflows due to payroll accounts payable. In addition, it is required to concentrate more on accumulating long-term debt for en suring higher rate of return and pay higher dividends to the shareholders (Ying 2014). Recommendation: Reduction in inventory level Improving the capital structure by maintaining a debt-to-equity ratio of 0.4 Reference List: Miihkinen, A., 2014. The Routledge Companion to Accounting, Reporting and Regulation.Accounting in Europe,11(2), pp.273-277. Ying, X.I.A.O., 2014. Review on the Checking Right of the Accounting Books.Journal of Heilongjiang Administrative Cadre College of Politics and Law,4, p.022.