Accounting for Managers

This article provides study material and solved assignments on Accounting for Managers. It includes answers to questions on income statements, balance sheets, profitability, and solvency. The article also explains the importance of analyzing the financial performance and financial position of an entity before lending funds or supplying materials on credit.

Running head: ACCOUNTING FOR MANAGERS
Accounting for Managers
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING FOR MANAGERS
Table of Contents
Answer to question 1:......................................................................................................................2
Sub part A:...................................................................................................................................2
Sub part B:...................................................................................................................................5
Answer to question 2:......................................................................................................................6
Sub part A:...................................................................................................................................6
Part 1:.......................................................................................................................................6
Part 2:.......................................................................................................................................7
Part 3:.......................................................................................................................................7
Part 4:.......................................................................................................................................8
Part 5:.......................................................................................................................................9
Sub part B:...................................................................................................................................9
References and bibliography:........................................................................................................11

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Answer to question 1:
Sub part A:
Ken Kennett Building Services
Income Statement for the year ended …….
Particulars Amount Amount
Building Services Revenue $ 5,50,000
Cost of materials consumed $ 3,10,000
Direct labour costs $ 1,53,500
Total Direct Expenses $ 4,63,500
Gross Profit $ 86,500
Operating Expenses:
Motor Vehicle Expenses $ 5,600
Electricity and Telephone Expenses $ 4,000
Total Operating Expenses $ 9,600
Net Profit $ 76,900
Income statement is the statement of financial performance, in which the net operating
result of the entity is measured with the details of every component of incomes and expenses.
There are various methods of preparing income statement. In the first part of the income
statement, incomes are presented with a breakup of operating revenues and non operating
revenues. Cost of revenue is deducted from the total revenue to find out the gross profit. For
entities trading in merchandise, the cost of goods sold is deducted, and for entities providing
services, the cost of revenue or the direct costs are deducted from the service revenue to find out
the amount of gross profit. In other words, all the direct costs are deducted from the revenues to
get the amount of gross profit. In the given case study, the Ken Kennett Building Services is a
construction company, and have two major components of the direct expenses, one is the
materials consumed and the other is the direct wages. In the second part of the income statement

3ACCOUNTING FOR MANAGERS
all the indirect expenses or all the operating expenses are deducted from the gross profit to find
out the net operating result or the net profit. In the above statement, all the incomes and expenses
of Ken Kennett Building Services have been arranged in such manner and the net profit is
computed to $76,900. The next part of the financial statement is the Statement of Financial
position or the balance sheet, which is prepared as follows.
Ken Kennett Building Services
Balance Sheet as at ……….
Amount Amount
Current Assets:
Cash and Cash Equivalent $ 4,300
Accounts Receivable $ 80,000
Inventory $ 18,000
Total Current Assets $ 1,02,300
Non-Current Assets:
Equipment $ 68,000
Motor Vehicle $ 32,000
Total Non-Current Assets $ 1,00,000
Total Assets $ 2,02,300
Current Liabilities:
Accounts Payable $ 30,000
Outstanding Expenses $ 3,500
Total Current Liabilities $ 33,500
Non-Current Liabilities: $ -
Total Liabilities $ 33,500
Net Assets $ 1,68,800
Equity:
Owner's Capital $ 97,600
Drawings $ (5,700)
Retained Earnings $ 76,900
Total Equity $ 1,68,800

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Balance sheet is nothing but a statement of financial position which shows the balances
of all the assets, liabilities and the equities of an entity. There are mainly two parts of the balance
sheet, one is the assets, and the other is the liabilities and equities. Further, assets and liabilities
can be presented in different heads according to their characteristics. In the assets part, it is
shown in two heads, one is the current assets and the other is the noncurrent assets. Current
assets are those which can be converted into cash in very short period of time, and on the other
hand, the noncurrent assets constitutes the fixed assets which requires a huge capital investment
and which are meant for a long term use. In the balance sheet of the Ken Kennett Building
Services, all the components of their assets have been present in these two heads, and it can be
observed that, there are total current assets of $102,300 and a total noncurrent asset of $100,000.
Noncurrent assets are presented net of depreciation, hence the accumulated depreciation for the
respective assets have been deducted to find the net value of the noncurrent assets.
In the same way, the liabilities are also classified in two heads, one is the current
liabilities and the other is the noncurrent liabilities. Under current liabilities, all the short term
liabilities have been shown and under noncurrent liabilities all the long term liabilities have been
shown. The most important part of the balance sheet is the equity section, in this section, the net
worth of the company is presented by the capital amount of the owners. Net worth means, the net
of assets after deducting total liabilities from the total assets. In the above case study, it can be
observed that, there is a total equity of $168,800 which is equal to the value of net assets.

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Sub part B:
There are two important parts of the financial statements of an entity, one is the income
statement and another is the balance sheet. Income statement shows the trading and operating
performance of the entity for a given period and the balance sheet reveals the financial position
of the company as on a particular date (Kaplan and Atkinson 2015). From the income statement,
company’s current profitability can be observed and based on such information the profitability
trend for a near future can be estimated for the company. It can be observed from the income
statement of the Ken Kennett Building Services that, they are having a gross profit margin of
15.73 percent and a net profit margin of 13.98 percent. It can be said that they are having a
significant profitability and an efficient management lead them to reduce the operating expenses,
which resulted into a very less operating expenses margin and a higher net profit margin. For
making a conscious decision about lending credit to the Ken Kennett Building Services,
profitability analysis is not the only measure, the short term and long-term liquidity analysis is
important. It can be observed from their balance sheet that, they are having a current ratio of
3.05:1, which is much higher than the standard current ratio of 2:1. The quick ratio of the
company is 2.52:1 which is again much higher than the standard quick ratio of 1:1. Hence, it can
be commented that they are having a good short-term liquidity and solvency. On the other hand,
the debt to equity ratio is only 0.20 which is very low and it implies they are having very less
amount of debt in their capital structure. Therefore, they are having a good short-term as well as
long-term solvency. Suppliers always seek to analyze the short term and long-term solvency of
an entity before supplying materials on credit. As the Ken Kennett Building Services is having a
good solvency, suppliers can trade with them without much worry about the recovery of their
debts.

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Profitability and the solvency of the business are the key areas, which indicate whether,
and entity is able to pay off their short term debts in time. In the above analysis, it can be
observed that, both these areas are strong and having a good remark for the Ken Kennett
Building Services. On the other hand, higher amount of debt in the capital structure of the
company and lower degree of solvency may cause some concerns for the suppliers (Williams and
Dobelman 2017). Therefore, it can be concluded that, the solvency and the profitability of the
entity which is exhibited in the financial statement, are the two main parameters, which are
checked and assessed by the lenders and the suppliers, to make the decision of lending funds to
the entity or to supply materials on credit. If the statement of financial performance and the
statement of financial position exhibit a good remark on these two parameters, then the creditors
are willing to supply materials to the entity on credit.
Answer to question 2:
Sub part A:
Part 1:
Accounting service
income $ 9,750
Less: Expenses:
Office supplies expenses $ 840
Telephone expenses $ 255
Motor vehicle expenses $ 330
Advertising expenses $ 510
Total Expenses $ 1,935
Profit for the year $ 7,815

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Profit is the excess of income over expenditure for a given period of time. To find out the
amount of profit earned by an entity within a given period of time, all the expenses are deducted
from the incomes (Wahlen, Baginski and Bradshaw 2014). In the above computation, all the
expenses for the given period of time have been deducted to find out the net operating result or
the amount of net profit earned by the Clive Calmer. It can be observed that, the net operating
result for the Clive Calmer is $7,815.
Part 2:
Current Assets:
Office supplies $ 1,500
Accounts receivables $ 1,500
Cash at bank $ 8,445
Total current assets $ 11,445
Non-Current Assets:
Computer equipment $ 8,250
Total noncurrent assets $ 8,250
Total Assets $ 19,695
Total assets include both the current and noncurrent assets. In the above computation, it
can be observed that, there are total current assets of $11,445 and a total noncurrent asset of
$8,250. To find out the total assets, those two components of the assets have been added together
and the value of total assets becomes $19,695.
Part 3:
Current Liabilities:
Accounts payable $ 1,080
Total current liabilities $ 1,080
Non-Current Liabilities:

8ACCOUNTING FOR MANAGERS
Bank loan $ 7,500
Total noncurrent
liabilities $ 7,500
Total Liabilities $ 8,580
In the same way, the total liabilities have been computed. It can be observed that, there
are total current liabilities of $1,080, which is only the accounts payable and a total noncurrent
liability of $7,500 which includes only the Bank Loan. Total liability is a part of the statement of
financial position. And it must be computed and presented accurately. It should be presented in
different heads for a better understandability of the actual financial position of the entity. That is
why the total liability has been computed in two parts in the above computations.
Part 4:
Initial contribution by Clive $ 3,300
Add: Profit for the year $ 7,815
Clive Calmer's Capital balance at the year end $ 11,115
Capital is the owners claim in an entity. As the owner is the claimant of the residual
income of the entity, the net profit for the year is always added with the capital. To run a
business fund or the capital is required and that is contributed by the owners of the entity
(Wahlen, Baginski and Bradshaw 2014). In the given case study of the Clive Calmer, it can be
observed that, there is an initial contribution by the owner for an amount of $3,000. As it has
already been computed in the previous part, that their net operating result is positive and they
have earned a profit of $7,815 for the year. To compute the ending capital balance of the Clive
Calmer, the net profits earned by him have been added with the initial contribution and the
ending capital balance becomes $11,115.

9ACCOUNTING FOR MANAGERS
Part 5:
Cash Inflows:
Initial contribution by Clive $ 3,300
Accounting service income received $ 8,250
Bank loan received $ 9,000
Total Cash Inflow $ 20,550
Cash Outflows:
Expenses paid $ 2,355
Repayment of loan $ 1,500
Equipment purchase $ 8,250
Total Cash Outflow $ (12,105)
Net Cash Inflow $ 8,445
Cash flow is the net result of cash receipts and cash payments. In a formal cash flow
statement, all those receipts and payments of cash are classified into different heads and
presented accordingly. The net change in cash for a given period of time is adjusted with the
opening cash balance to find out the ending cash balance. In the above computation, the total
cash receipts are $20,550 and the total cash payments are $12,105. If the total cash payments can
be deducted from the total cash receipts then the net cash flow for a period can be found out. In
the above computation, it can be seen that, the net cash flow is positive, which is $8,445. As
there is no beginning balance in the cash, the net change in cash is equal to the ending cash
balance.
Sub part B:
Clive is the owner of the given entity in the case study. If any amount is contributed to
the business by him, then it is recognized as the capital to the business and on the other hand, if
any amount is withdrawn by him, then it is recognized as the drawings. Drawings are deducted

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from the capital to find out the net capital balance. It can be found in the given case study, that a
total of $3,000 was contributed by Clive as capital for the business. If the net profit earned
through the operating activities is added with the beginning balance of the capital, then total
ending balance of the capital becomes $11,115. Now, if some amount is withdrawn by Clive,
then it will increase the drawings or withdrawals of from the business. If such withdrawals are
made by the owner of the entity, then there would be no effect on the operating result of the
organization. It will just affect the cash balance and the capital of the owner. By such
withdrawals, drawings increases and the net capital balance decreases. In the given case study, it
can be observed that, if $3,000 is withdrawn by Clive then the capital balance will be decreased
by the same amount. Hence, it can be concluded that, if Clive had withdrawn $3,000 in cash
during the year, then the current assets would have decreased by $3,000 and the total assets of
the company would have decreased by $3,000. On the other hand, the total capital at the yearend
would have decreased by $3,000. For this even there would no impact on the profitability of the
company. Such withdrawals of capital by the owner of the entity must be treated properly in the
financial books of accounts and must be disclosed properly in the financial statement of the
entity. There must be some predefined policies for such withdrawal, and if such withdrawals are
not paid back by the owner of the entity, then there should be a provision of charging interest on
the drawings too (Wahlen, Baginski and Bradshaw 2014).

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References and bibliography:
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Hilton, R.W. and Platt, D.E., 2013. Managerial accounting: creating value in a dynamic business
environment. McGraw-Hill Education.
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Kaplan, R.S. and Atkinson, A.A., 2015. Advanced management accounting. PHI Learning.
Lee, T.A. and Parker, R.H. eds., 2014. Evolution of Corporate Financial Reporting (RLE
Accounting). Routledge.

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Macve, R., 2015. A Conceptual Framework for Financial Accounting and Reporting: Vision,
Tool, Or Threat?. Routledge.
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Tool, Or Threat?. Routledge.
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Palepu, K.G. and Healy, P.M., 2013. Business analysis and valuation: Using financial
statements, text and cases.
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statement analysis. John Wiley & Sons.
Wahlen, J.M., Baginski, S.P. and Bradshaw, M., 2014. Financial reporting, financial statement
analysis and valuation. Nelson Education.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.
Williams, E.E. and Dobelman, J.A., 2017. Financial statement analysis. World Scientific Book
Chapters, pp.109-169.