EDUDORM ACADEMIC SERVICES

BESWICK POTTERY

Introduction

Founded in 1968 in London, United Kingdom, Beswick Pottery Inc. is a multinational company that specializes in pottery manufacture. The company strives to manufacture high-quality antiques from the ancient artwork of clay modeling. Due to the invention of modern building materials that are long-lasting and hard to break, the company has been struggling financially in the last few years. In the quest for re-inventing itself, the company has decided to analyze its financial performance, taking into close consideration its accounting model. The rationale is to ensure that the financial accounting model is in accordance with the accepted accounting principles. Apparently, the aim of financial accounting is to keep track of an organization’s financial transactions by ensuring that all transactions are recorded and later presented in financial reports accordingly. This paper thus examines financial accounting process for Beswick Pottery Inc. as well as its financial records.

Learning outcome 1

The idea behind this learning outcome is to assess whether the company has been able to record its business transactions using the double-entry book-keeping method (Albrecht, et al., 2010). This method denotes that every transaction made in the organization affects at least two accounts. For instance, when the company makes cash purchases, the cash account decreases while the purchases account increases with the same amount. The main advantage of this system is that at any given time, the balance of the company’s asset account will be equal to the balance of its liability and equity account. For instance, when a company sells something in cash, sales account is credited while the cash account is debited. At the same time, when a company sells something on credit, the account receivable is debited while the sales account is credited.

Using the above model, Beswick made the following sales as recorded in the sales journal.

Fig. 1: Sales Journal

From the above journal, each entry has a counter-entry that has the same amount. Each of the entry has a transaction date, the invoice number, customer’s name, account number, and sale amount. With the amount, either cash or account receivable is debited, while the sales account is credited with the same amount. Apart from account receivable and cash account, any sale made by the company affects the inventory account. This is to mean that the number of stock reduces with the same amount being sold. It is good to note that a sales journal may have multiple columns depending on the number of accounts being affected. For instance, if there is a sales tax for every item being sold, it is good to add this column. Nonetheless, Beswick is not required to pay sales tax for its products.

The purchases journal records purchases made on credit. In this case, the journal has five columns namely date, order number, supplier name, reference, and the amount. After every purchase, the account payable is credited with the amount while the purchases account is debited with the same amount. Where cash is used to purchase items, the cash account is credited instead of the account payable. The figure below is a purchases journal for Beswick for the year 2017.

Fig. 2: Purchases journal

The trial balance checks whether the total debit is equal to the total credit. The rationale behind a trial balance is to check the arithmetic accuracy of the double entry rule used. This is because while recoding books of account, the accountant may make some errors, which are hard to detect. In case of such a mismatch, a temporary adjustment account may be created, which makes it possible to correct the ledgers. The figure below indicates the trial balance for Beswick as at November 30, 2017.

Fig.3: Trial balance

Beswick Pottery Inc.
Trial Balance
For the year ended 30th Nov 2017
	Dr.	Cr.
Cash	161300
Account receivable	179600
Inventory	65000
Fixed assets	100000
Account payable		75200
Accrued Liabilities		65200
Notes payable		0
Equity		170000
Revenue		321100
Cost of goods sold	134400
Salaries		10000
Administrative expenses		18000
Payroll taxes		0
Depreciation		15000
Rent		3200
Other expenses		21500
Suspence Account	58900
Total	699200	699200

Learning outcome 2

The following are final accounts for a limited company with figures being adjusted for accruals, depreciation, and prepayments. The income statement indicates a revenue of $ 321,100, which are obtained from both cash sales and credit sales. Under the accrual basis of accounting, revenues are reported in the income statement when they are earned. At the same time, expenses are matched with the related revenue and are reported when they occur. With this in mind, the revenue indicated in the income statement is as per the end of the financial year, while the expenses are as per that time. This means that whether some of the purchases have not been paid for, they are accounted in the income statement. With this in mind, Beswick had a profit margin of 58.14%, which is a very high margin.

On the other hand, depreciation is calculated on a reducing balance method in order to write off the cost of the assets over their useful lives (Albrecht, et al., 2010). Since there is no specification of the kind of fixed assets that need to be depreciated, the analysis used 12.5% annual rate of depreciation, which is meant for plant machinery and equipment, and furniture and fittings. The rate was based on the fact that being a pottery manufacturing company, most of the fixed assets are plant machinery and equipment. Lastly, the tax was computed using the current corporate tax of 30% of profit before taxation. It is good to note that other taxes such as salary’s taxes are computed separately. The figure below indicates the income statement for Beswick Pottery Inc. for the year ended November 30, 2017.

Fig.4: Income statement

Beswick Pottery Inc.
P & L Account
For the year ended 30th Nov 2017

Revenue		321100

Cost of sales		134400

Gross profit		186700
Expenses
Salaries	10000
Payroll taxes	0
Administrative Expenses	18000
Depreciation	12500
Rent	3200
Other expenses	21500
Total expenses		65200

Net profit before tax		121500
Tax		36450

Net Profit After Tax		85050

The balance sheet, on the other hand, summarizes the company’s assets, liabilities, and shareholders’ equity. The rationale is to provide investors with an idea of what the company owns and owes, as well as the amount invested by shareholders. The general rule is that assets must be equal to liabilities plus shareholders’ equity. With this in mind, Beswick’s value of total assets is $505,900. It is good to note that the company’s current assets are more than four times the value of its fixed assets, which means it is highly liquid. The advantage of this is that the company can be able to operate efficiently without much hindrance. Nonetheless, it is hard for the company to obtain additional funds since with this high rate of liquidity. Perhaps the shift from pottery manufacturing by most of the players in the market has contributed to the rapid shift.

On the other hand, the company does not have any long-term liability, which means it is not constrained in the payment of interest and the principal amount. On the contrary, it has tried to maintain a low value in terms of current liabilities. This means that the current ratio of the company is very high and this means that it is able to convert its product into cash. At the same time, the company did not issue any dividend, which means it retained all its earnings. While this may be good for the company, the drawings are very high, with no much information provided to explain the use of such drawings. This calls for investigation about the financial management of the company. The figure below indicates the balance sheet of Beswick as at November 30, 2017.

Fig.5: Balance sheet

Beswick Pottery Inc.
Balance Sheet
As at 30th Nov 2017
ASSETS
Non Current Assets
Fixed Assets	100000

Current Assets
Cash and bank	161300
Account receivable	179600
Inventory	65000	405900

TOTAL ASSETS		505900

LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities
Account payable	75200
Accrued Liabilities	65200
Notes payable	0
		140400

Equity and Reserves
Share Capital	170000
Retained Earnings	85050
Drawings	110450
		365500

Total Equity & Liabilities		505900

The cash flow statement of the company indicates an increment in cash from both operating and investing activity. A positive operating cash flow is an indication that the company is able to collect its debts on time. For this reason, it is possible for the company to pay its expenses on time, which creates a good relationship with the suppliers. Nonetheless, this may also be an indication that the company is not doing enough to sell its products and this may be a constraint to revenue. On the other hand, a positive cash flow from investment activities means that the company is not investing well. From Beswick’s cash flow statement, the company has not invested in any asset for the past financial year. This may be a constraint to for the future inflow of revenue for the company. With the depreciation rate for its fixed assets being at 12.5%, the company needs to invest more in order to remain profitable. Lastly, the company has a negative cash flow from financing activities, which means that more money is flowing out of the company as opposed to those that are being injected. With no payment of dividends, it can only be assumed that the company is retiring its debts or repurchasing its stocks. The figure below indicates the company’s cash flow statement.

Fig.6: cash flow statement

Beswick Pottery Inc.
Balance Sheet
As at 30th Nov 2017

Cash flow from Operative Activities:
cash
Net earnings
Cash receipt from customers	141500
Cash paid to suppliers and employees	-59200
Depreciation and amortization	-12500
interest and other expenses paid	65200
add: depreciation	12500
Net cash (used in) provided by operating activities	147500
Cash Flows from Investing Activities:
Proceeds from sale of equipment	85000
Net cash used in investing activities	-20000
Net cash flows from investing activities	65000
Cash Flows from Financing Activities:
Retained earnings	85050
Drawings	-110450
Proceeds from exercise of stock options
Net cash provided by (used in) financing activities
Net (decrease) increase in cash	-25400

Cash and cash equivalents:	187100

Lesson outcome 3

The purpose of performing bank reconciliation is to ensure that the company and bank records are correct. The reconciliation is performed after obtaining a bank statement that is prepared by the bank. The statement indicates all the bank charges, deposits, and other credits, as well as checks and debits (Cole, 2016). From the statement, the bank balance as at November 30, 2017, was $13,000, while the company’s records showed a balance of $11,600. At the same time, all the checks issued to the customers for the month of November were still outstanding, with all the deposits made during the last week of November never appearing on the bank statement. A deposit made on the same day of $ 650 did not appear on the bank statement. The bank charged $50 as a service fee. Lastly, a deposit of $540 had been incorrectly entered as $450 in the cash records.

A reconciliation statement as per the information provided would look as follows.

Fig.7: bank reconciliation statement

Beswick Pottery Inc.
Balance Sheet
As at 30th Nov 2017

Balance as per bank, Nov 30		13000
add: deposit in Transit		650
		13650
less: Outstanding checks
	5600
		5600
Adjusted Bank balance		8050


Balance as per the books, Nov 30		11600
add: deposit understated	90
		90
		11690
less: NSF Check	3640
		3640
Adjusted book balance		8050

Control and suspense account are zeroed out automatically after the end of the financial period. This means that the balances in those accounts are moved to other accounts, leaving a zero balance. The process of closing these accounts begins by checking if there are differences in the journals. Most of the issues arise from journals posted directly to the control account and the opening balances that are entered into the customer’s account. If there are data from previous months, it is good to check them to ensure they are the opening balance of the preceding month. Once the data is correctly keyed in, the following step involves closing the suspense and control account.

Conclusion and recommendation

Based on the data provided, Beswick has maintained proper books of accounts. The double entry and the accrual basis of accounting enables someone to note those accounts that are affected by any transaction. Revenues are recorded when they are earned while expenses are reported when they are incurred. Nonetheless, the company needs to work on certain issues to ensure that proper accounts are maintained. First, it needs to separate the different fixed assets in order to determine the appropriate rate to apply while computing depreciation. This will provide accurate figures for depreciation. Secondly, it should keep separate records for its cash and bank. This is in order to articulate cash at hand and cash at the bank. Lastly, the company needs to invest more since it has a high liquidity ratio. This will not only increase revenue but also improve on investor rating.

Bibliography

Albrecht, W., Stice, E. & Stice, J., 2010. Financial Accounting. 11 ed. Boston: Cengage Learning.

Cole, E. S., 2016. Monthly Bank Reconciliation Statement Log. New York: CreateSpace Independent Publishing Platform.

2223 Words 8 Pages

BESWICK POTTERY

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