Conclusion and Recommendation

This report provides a summary of the financial performance of Chalkboard Supplies, including the analysis of financial statements and ratios. It also discusses the recommended depreciation method and internal control mechanisms. The conclusion and recommendation suggest controlling expenses and increasing sales to improve profitability.

Running head: ACCOUNTING
Accounting
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1ACCOUNTING3.0 Conclusion and recommendation
Table of Contents
1.0 Introduction................................................................................................................................2
2.0 The report...................................................................................................................................2
(a) Financial statement.................................................................................................................2
(b) Financial performance and financial position........................................................................2
(c) Depreciation method..................................................................................................................3
(d) Methods of inventory.............................................................................................................5
(e) Internal control mechanisms..................................................................................................5
3.0 Conclusion and recommendation..............................................................................................5
4.0 List of reference.........................................................................................................................6

2ACCOUNTING3.0 Conclusion and recommendation
1.0 Introduction
The main purpose of the report is to summarise the financial performance of Chalkboard
Supplies based on the financial statements that will be prepared as a part of the task. The task
will prepare financial statements including income statement, balance sheet and will perform
ratio analysis based on the financial statements. The report will further focus on the policies and
strategies that can be applied by it to improve its profitability position and the depreciation
method that will be most appropriate for the company (Robinson et al. 2015).
2.0 The report
(a) Financial statement
From the income statement of the company it is found that the entity only has the sales
revenue and service revenue as the source of income. Different heads of expenses for the entity
includes COGS, wage expenses, interest expenses and insurance expenses. Total expenses of the
entity amounted to $ 26,685.92 whereas the amount of gross profit was only $ 12,702.20 leading
to loss of an amount of $ 13,983.72. On the hand, the balance sheet of the company is signifying
that current ratio of the company is not sufficient to pay off the current liabilities (Easton and
Sommers 2018). However, it is also found that the company is highly dependent on debt as
major portion of the capital is debt component.
(b) Financial performance and financial position
Financial performances of the company are measured through various ratios like net
profit margin, gross profit margin, current ratio, quick ratio and debt equity ratio. Net profit
margin depicts the profit earning capability of the company from the revenues after meeting all

3ACCOUNTING3.0 Conclusion and recommendation
the expenses. Looking into the net profit margin it is identified that the company was not able to
generate positive income for the year and the net loss led to negative net profit margin of the
company. Gross profit margin signifies the profit available to the company after meeting the cost
for selling the goods (Loughran and McDonald 2014). Gross profit margin of 60.57% is
indicating that the company is able to generate sufficient income from its revenue after meeting
the cost for selling the goods. For measuring the liquidity level of the entity its liquidity ratios
including the current ratio and quick ratio are computed. It represents the position of the
company regarding its ability to meet the short term obligation with the available current assets.
Current assets of the company is 0.803 that is signifying that the company is not able to pay off
its current liabilities and its liquidity position is not good as the current ratio of 2:1 suggests that
the company’s liquidity position is good. Further, the quick assets ratio is signifying that the
quick assets are not adequate to make payment for its short term liabilities (Loughran and
McDonald 2014). Looking into the debt equity ratio it can be identified that the company is over
dependent on outside borrowing as compared to the equity. Hence, regarding the overall
financial performance of the company it can be stated that financially the company is not sound
as its profitability, liquidity and leverage position is not good.
(c) Depreciation method
Depreciation methods available to the company are straight line method and reducing
balance method.
Straight line method – under this approach the cost of the asset is reduced each year by the same
amount over the estimated useful life of the assets after reducing the expected salvage value.
Advantages –

4ACCOUNTING3.0 Conclusion and recommendation
 The method is simple and easy to use
 Asset is depreciated unto net scrap value or to nil value. Hence, this method facilitates in
distributing entire depreciable cost over the asset’s useful life
 Each year same amount of depreciation is charged to the account of profit and loss. It
makes easier for the comparison of profits in each year
 This approach is suitable for the assets whose useful life can be accurately estimated and
where use of the asset is consistent for each year (Ahmad 2016)
Reducing balance method – under this approach depreciation rate is fixed however unlike the
straight line method under this method depreciation charged in each year is different as it is
provided on the remaining book value of the asset.
Advantages –
 This method is acceptable for the purpose of income tax
 It matches with the revenue and cost of business. Large amount is charged for
depreciation in the initial years and lower amount is charged at later periods
 It equalizes yearly burden on the income statement in context of repairs as well as
depreciation both. Depreciation amount keeps on reducing while the expenses of repairs
keeps on increasing (Sridharan 2015)
Hence, comparing both the method it is recommended that the entity shall continue with
straight line method. The reason behind that is the amount of depreciation is equally spread over
the life of the asset and does not put extra burden on company during initial days of the assets.

5ACCOUNTING3.0 Conclusion and recommendation
(d) Methods of inventory
Except the perpetual inventory the company can use periodic inventory under which the
inventory amount is determined at the closing of each accounting period. As it is conducted at
the end of the accounting period it does not consider the increase or decrease in the value of
inventories and hence, cannot be used for making powerful decisions regarding inventories (Cao,
Chychyla and Stewart 2015).
(e) Internal control mechanisms
 Bank reconciliation – the company shall regularly carry out the bank reconciliation so
that there will be less chances of cash misappropriation. It will further ensure that the
cash are not involved with fraud or error (Coates 2014)
3.0 Conclusion and recommendation
From the above it can be concluded that the overall financial performance of the
company is not goods and financially the company is not sound as its profitability, liquidity and
leverage position is not good. Hence, the company is recommended that it shall control its
expenses, wherever possible to increase the profitability. Moreover, the entity shall try to
increase its sales that will improve its profitability position as well as the current assets like cash
and accounts receivable. Further, in context of depreciation method it is recommended that the
company shall use straight line method. The reason behind that is the amount of depreciation is
equally spread over the life of the asset and does not put extra burden on company during initial
days of the assets.

6ACCOUNTING3.0 Conclusion and recommendation
4.0 List of reference
Ahmad, R., 2016. A Study of Relationship between Liquidity and Profitability of Standard
Charterd Bank Pakistan: Analysis of Financial Statement Approach. Global Journal of
Management And Business Research.
Cao, M., Chychyla, R. and Stewart, T., 2015. Big Data analytics in financial statement
audits. Accounting Horizons, 29(2), pp.423-429.
Coates IV, J.C., 2014. Cost-benefit analysis of financial regulation: Case studies and
implications. Yale LJ, 124, p.882.
Easton, M. and Sommers, Z., 2018. Financial Statement Analysis & Valuation, 5e.
Loughran, T. and McDonald, B., 2014. Measuring readability in financial disclosures. The
Journal of Finance, 69(4), pp.1643-1671.
Robinson, T.R., Henry, E., Pirie, W.L. and Broihahn, M.A., 2015. International financial
statement analysis. John Wiley & Sons.
Sridharan, S.A., 2015. Volatility forecasting using financial statement information. The
Accounting Review, 90(5), pp.2079-2106.