Assessment of Source and Structure of Trial Balance

In the provided content, there is a focus on materials for manufacturing goods and services. The concept of variance is discussed, specifically sales volume and sales price variances. A trial balance is prepared by taking final balances from ledger accounts, which helps verify accounts. Three scenarios are presented: accrued expenses, interest income, and changes in liability. A summary of the assignment content can be provided below:

FINANCE IN HOSPITALITY

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
1.1 Sources of finance available to business..........................................................................1
1.2 Various methods of generating income............................................................................1
TASK 2............................................................................................................................................2
2.1 Elements of cost, gross profit and selling price of the products and services..................2
2.2 Evaluation of controlling cash and stock in the business.................................................2
TASK 3............................................................................................................................................3
3.3 Process and purpose of budgetary control........................................................................3
3.4 Analysis of budget variance.............................................................................................3
TASK 4............................................................................................................................................4
3.1 Assessment of source and structure of trial balance.........................................................4
3.2 Adjustments in financial statements.................................................................................5
4.1 Ratio analysis...................................................................................................................8
4.2 Future management strategies..........................................................................................9
TASK 5............................................................................................................................................9
5.2 Cost volume profit relationship......................................................................................10
5.3 Short term management decisions based on break even calculations............................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
Finance is a vital factor for the growth of any organization. If, there will be lack of
finance then, it will be difficult to perform operations in a proper manner. In the report, sources
of finance are discussed in detail. Along with this, various methods of generating income are also
explained for the restaurant business. After that, stock and cash control techniques are also
explained in detail in the report. In the middle part of report, ratio analysis is done and its results
are interpreted in a proper manner. At the end of the report, break even analysis is done and the
best alternative is selected for the firm.
(Good)

1.1 Sources of finance available to business Equity- This is commonly available source of finance to the business firms. For this,
companies need to fulfill some of the criteria that are laid down by the regulatory
authorities. Hence, business firms can resort to this source of finance if they are eligible
to get listed in the primary market. Advantage- The main advantage of this source of finance is that finance cost is adjustable
in nature. Disadvantage- The main disadvantage is that control of existing shareholders gets diluted
in the firm. Debt- This is another source of finance that is used by the business firms. Companies can
finance their funds requirements by taking loan at cheaper rate (De Mooij, 2012). Hence,
this can also be used to finance the business operations. Advantage- The main advantage of debt is that control of existing shareholders does not
get diluted in the firm. Disadvantage- The main disadvantage is that finance cost may elevate if loan is taken at
the flexible interest rate. Venture capital- This is a variant of equity and in this source of finance, firms does not
need to get listed in the primary market. Advantage- Under this source of finance the main advantage is that, private firm makes
an investment in the client company and in return, gets a shareholding in the client firm.
 Disadvantage- The main disadvantage is that control of existing shareholders gets diluted
in the firm. Thus, companies can also use this source of finance.
 Loan syndication- This is a finance source in which debt is specifically taken for doing
international transaction. This loan is allocated by the more than one bank. These banks
create a group and fulfill fund requirements of the firms.
 Advantage- The main advantage of this source of finance is that huge fund can be finance
through multiple banks. Hence, it is easy to get a loan amount.
 Disadvantage- Lots of paper formalities are needed to raise fund through loan
syndication due to which huge time of the firm is spent for taking a loan.

 Consortium finance- This is opposite of loan syndication and under this, loan is given
for domestic transactions. This is the main reason due to which consortium finance is
gaining popularity in nations like USA. The advantage and disadvantage of consortium
finance and loan syndication are same.
 Short term loan- This sort of debt is taken by the firms to fulfill their working capital
needs. These loans could be secured or unsecured in nature.
 Advantage- The main benefit of short term loan is that by using same short term working
capital needs of the firm is satisfied.
 Disadvantage- The main limitation is that banks sometimes demand security of some
assets and firm is not in position to do so. Hence, they need to resort to business friends
for taking a loan.
 Retained earnings- It is an amount that comes in existence after deducting all expenses
from the income. There is no cost of this source of finance.
 Advantage- The main advantage of retained earnings is that there is no cost of this source
of finance. Hence, finance cost does not changed due to retained earnings.
 Disadvantage- There is no disadvantage of retained earnings. (Good) You have to
recommend some sources (at least 3) for the capital expenditure (purchase of machinery
for £50,000) for your small business. You can choose one out of those 3, explaining the
reasons for your choice.
Out of all these sources of finance, retained earnings, short term loan and debt are the
important sources of finance. The requirement of firm is short term in nature and thus, it cannot
use long term source of finance in order to fund its requirement. Out of these sources of finance,
it will be better to take short term loan because any bank will be ready to give such kind of loan
to the firm without demanding any security amount.

1.2 Various methods of generating income for large chain restaurant Sales- Sales is one of the important methods that are used to generate income. Without
generating sales, no business firm can survive in the market. In this regard, firms can
market their products in unique ways in order to attract customer attention towards their
products. Giving a place for specific occasion- Restaurants can give a specific space for
conducting small parties like birthday parties etc in order to earn revenue (Knight, 2012).
Apart from sales, this will be another source of income for the restaurants and it is its
major advantage. There is no disadvantage of this source of income. Home delivery service- Restaurants can provide home delivery service to the people. In
large cities, people do not have lot of time to cook food at home. Even many times, they
do not have time to travel some distance to fetch food. In such situation, people will
prefer to avail facility of home delivery service. Due to this reason it becomes good
source of income for the firm. There is no disadvantage of this source of income. So, it
can be said that this is also an important source of revenue for the restaurants. Investment in securities- Restaurants can make an investment in the shares, bonds and
mutual funds in order to generate extra income for the business. Hence, this is source of
earning extra income for the business.
 Opening a bar- Restaurant can open a bar and can provide food and drink facility under
one roof. By doing so they can create their distinct image among the customers.
(Good)
TASK 2
2.1 Elements of cost, gross profit and selling price of the products and services Cost- Elements of cost for Mark & Spencer are direct and indirect cost as well as fixed
and variable cost. Direct cost is those cost that are directly related to the production or
creation of service. Raw material purchase is the example of direct cost. On other hand,
indirect cost refers to the cost that is supplementary to supply of goods and services
(Bakan, 2012). Sales expenses are the best example of the indirect cost. These costs may
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be fixed or variable in nature. Firms must try to reduce variable cost in order to earn more
profit on sales. Gross profit- Gross profit refers to the profit that remains after deducting direct expenses
from revenue. Due to this reason, its main components are sales and direct expenses. By
doing mentioned calculation, gross profit is computed by the managers.
 Sales price- Sales price is computed by adding all expenses. After doing same, specific
percentage is added to the cost in order to earn profit (Nussbaum, 2012). By doing same,
sales price is computed. Hence, expenses and mark up percentage are two components of
the sales price.
 Direct material- It is a materiel that is used for production. Hence, this cost is known as
direct material cost. Purchase of food items for preparing dishes is the direct material cost
for restaurant.
 Indirect material- It is a materiel that is not used in production process. Transportation
expenses for home delivery are the example of the indirect material cost.
 Direct labor- These are those labors that are directly involved in the production process.
Cost related to them is known as direct labor cost. Employees that are coking food in
restaurant are direct labors.
 Indirect labor- These are those labors that are not involved in the production process.
Cost related to them is known as indirect cost. Employees that are engaged in
transportation of goods are the indirect labors and cost related to them is the indirect cost.
 Direct expenses-These are production related cost and thus formed cost of production for
the firm. Gas expenses are the best example of the direct expenses.
 Indirect expenses- It is an expense that is not related to production process. Due to this
reason it is known as indirect cost. Storage cost is the indirect expenses for the firm.
 Fixed cost – It is a cost that never gets changed and remains fixed irrespective of
production of goods and services. If fresh investment is made then fixed cost of the firm
is increased. Investment in machines is best example of fixed cost.
 Variable cost- It is a cost that keeps on changing continuous and with increase in
production it reduced per unit. Purchase of raw material is the example of variable cost.
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 Semi variable cost- It is a cost of which some part remains fixed and some remains
variable. Firm can make changes in variable cost but cannot make adjustment in the fixed
cost. Cost of using machine for 5 hrs is $600 but when machine hours exceed these
hours, $10 will be charged per hour. Hence, up to 5hrs, there is a fixed cost and after that,
same cost becomes variable. Thus, cost of using machine is semi variable cost in nature.
(Add examples. Explain Semi Variable Cost with example)
2.2 Evaluation of controlling cash and stock in business (Explain stock and stages of stock)
Control of stock EOQ- In this technique, by applying a specific formula, minimum quantity is determined
that needs to be purchased to produce specific amount of commodity. Due to this reason,
this method is widely used at the production place. Suppose firm decide that when raw
material units will come to 1000 it will place an order for raw material purchase then it
means that 1000 is an EOQ for the firm.
 Minimum quantity- By making use of old data, Marks & Spencer can determine
minimum quantity that needs to be purchased to produce specific amount of products at
the workplace (Davila, Epstein. and Shelton, 2012). Thus, this technique is widely used
in the organization. Firm decide that it will purchase raw material when it will be reduced
to 500 and it is a minimum limit. Hence, when raw material is above this limit firm place
an order for purchase of raw material. The main difference between minimum quantity
and EOQ is that in latter method minimum quantity is determined by using formula but in
former method no formula is used for determining minimum required quantity. Firms
normally place an order when raw material reaches to minimum order quantity value. But
if due to some reason if failed to does so then it place an order before raw material
available quantity is above minimum order quantity. In this way stock is controlled by
using both methods.
 Just in time- This is a method which is employed for stock control. In this method actual
requirement is estimated and accordingly order for purchase is placed. Due to this
reason, this method is used by the firms. Firm stock is coming to end and firm
immediately place an order for purchase of 2000 units of raw material. It is an example of
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just in time method. This technique is widely used in Japan because material is available
to companies at short duration in Japan.
 Recorder point (ROP) – This technique is employed for controlling manual as well as
visual environment. This is the main plus point due to which this method is widely used
by organizations at the production place. Firm set a limit of 500 units and when stock will
reach to this level firm will place an order for purchase of products.
 LIFO- LIFO means last in first out and it says that units that are produced at end must be
sold first so that its value does not deteriorate. Firm produce product three times and in
first it produce 500 units. In second and third stage it produces 600 and 700 units. Under
LIFO firm will sell 700 units first of all then it will sale 600 and 500 units.
 FIFO – This concept state that inventory of units that is produced first must be sold first.
Hence, inventory that remains at the end of a year is sod at the end of the year. Firm
produce 500 and 700 units in first and second term. Under FIFO, it will sell 500 units and
then, it will sell 700 units.
 ANTIPATORY- It is a method used to estimate inventory requirements that will be
required in future. Hence, this method is often used in the industry.
 RESPONSE- It is a system that is used to control stock when business situation gets
changed. With change in condition by using this system new inventory control targets are
determined. Firm review business conditions and demand in the market and accordingly
it decide that it will purchase 400 units. After that it in next month again review
conditions and find out that demand is reduced. Hence, it purchases raw material units of
300. It is an example of RESPONSE system.
Stock and stages of stock
Stock refers to the inventory that is in the warehouse and used to produce goods and
making the products available. Stages of stock are as follows:
 Raw material- It is the material that is purchased by the firm in stock in order to produce
goods at the workplace. Such raw material after procurement is kept in the warehouse of
company to supply it in the market.
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 Work in progress- It refers to the inventory of processed raw material which will finally
be converted into goods at the production place. It is the second stage of inventory and
very important for the firm. Finished goods- This is the third stage of inventory in which finished goods are produced
and stored in warehouse of the firm.
Cash control techniques
Cash has due importance for the firm because transactions are completed in cash.
Without them, it is not possible to do business transactions in proper manner. Hence, cash has
very high importance to the business firms. In order to control cash, Marks & Spencer can follow
a cash management strategy under which it will centralize its payment system but will
decentralize its payment receipt system. This will reduce the speed of cash outflow and will
boost the cash inflow. Due to decentralization in payment receipt system, collection process of
cheque will be speed up. However, centralization of payment system will delay the payment
through cheque to the creditors. Bank reconciliation is a technique that is used to make sure that
all entries that are done by the firm in its books of accounts are accurate and matched to the firm
bank statements. There is a cash outflow of the 20,000 in the firm books and same in cash book
is 22000. Manager will reconcile this mismatch by using invoice copies and identify transaction
which is not entered in to the firm books of accounts.
Bank reconciliation statement is the method that helps the firm in detecting areas where
there are mistakes that occurred while entering figures. In this method, bank pass book entries
and company cash book entries are matched with each other and difference between them is
identified. Suppose Aquapet limited cash balance is 20,000 but balance of same account in
company’s cash book is 21000 then it means that there is a mistake in balance entered in the
company’s cash book. In order to identify an entry where mistake is made, all cash transaction
entries of bank pass book and cash book will be matched with each other. The entry which is
done in a wrong manner will be rectified by the firm’s accountant.
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(Explain Bank Reconciliation Statement with examples)
TASK 3
3.3 Process and purpose of budgetary control
Process of budgetary control is as follows: Preparation of budget- In this stage, budget is prepared and in this regard, managers
evaluate certain budget preparation techniques. By selecting appropriate technique, a
budget is prepared and under this, allocation of amount is done among various expenses. Measurement of performance- In this stage, performance of the firm is measured in
monetary terms in specific unit (Dekker and et.al, 2013). These units may be currency
and KM or any other thing. After measurement of performance the next step is to
compare e same with the predetermined standards. Comparison with standard and taking corrective action- This is the last step in which
actual results are compared with standards and corrective actions are taken where
required. This is done to make sure that such mistakes will be never committed again.
Purpose of budget: Cost control- In order to control cost, budget is prepared. Managers try to keep expenses
within the determined limit (Kim and et.al, 2010). Hence, cost control is the main
purpose behind preparing a budget.
 Employees’ motivation- Employees get a target to control expenses and due to this
reason, they get motivated to work hard. Hence, employee motivation is another main
objective of preparing a budget.
a) Process of budgetary control:
 Communicating details of budget policy and guidelines to those people responsible
for the preparation of budgets- It is the stage in which top management provide
guidelines document to those who are responsible for preparing a budget. By following
these guidelines employees prepare a budget in proper manner.
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 Determining the factors that restricts output and taking action to sort those out- In
this stage factors that are affecting company sales and production will be identified and
on that basis projections will be made,
 Preparation of the sales budget- after making projections sales budget will be prepared
and communicated to the managers.
 Initial preparation of various budgets- on the basis of approval of managers about
projection the budget value will be sub divided and various budgets will be prepared on
the basis of allocation.
 Negotiation of budgets with superiors- after preparing budget employees will discuss
same with the superiors and will make necessary changes in same.
 Coordination and review of budgets- finally budget will be reviewed and changes will
be made where needed.
 Final acceptance of budgets- In this last step budget will be finally accepted by the top
managers.
Budgetary control cycle:
Budget control cycle is as follows: Budget formulation- This is the first step in which budget is prepared by the managers at
the ground level. In respect to this estimates are prepared and on that basis budget is
prepared by the mangers. Budget enactment- In the second step a budget is reviewed by the top managers and they
make necessary changes in the budget if require. In this way budget values are modified. Budget implementation- This is the third stage in which budget is implemented by the
middle level managers. Under this they made all expenses in line to the values that are
determined in the budget. Budget review- In the third stage budget is reviewed and comparison of actual results
with the budget value is done. On that basis it is identified that firm give a good or poor
performance.
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 Taking a corrective action- If variance is negative then managers formulate a strategy in
order to make sure that such deviation will not come in existence. Hence, in the budget
control cycle operates.
(Good)
3.4 Analysis of budget variance
Table 1: Comparison of budgeted performance with actual performance
Budgeted Actual Variance
Units sold 100000 75000 -25000
Material 15000 22500 -7500
Direct labor 22500 24375 -1875
Table 2: Variance of direct material and labor
Material labor
Price/rate variance -4500 3750
Usage/ efficiency variance -3000 -5625
Total variance -7500 -1875
Units sold variance
Due to low sale of the units, expected variance is negative. Due to higher unemployment
and inflation rate, people have low savings and due to this reason, firm is failed to make target
sales.
Labour rate variance- It is variance that compares actual rate at which labours are paid and
budgeted rate at which firm intends to pay to its workforce. Labour rate variance is
negative and it means that labours are employed at the higher wage rate then the rate
that was earlier determined in the budget. In order to make sure that such variance will
not comes in existence firm can make accurate estimate of the labour rates that will be
needed to pay to them in order to retain them at the production place.
Labour efficiency- Labour variance is negative and this means that Yuri overuses labour for the
production of goods and services. This happened because firm make an accurate
estimation about the labours that are required to produce target units. Hence, firms must
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review its past production units and number of labours it employed earlier. On that basis
it will be able to keep its labour efficiency within budget.
Material price- This variance for material is negative and this means that materials are
purchased at higher price then budgeted. Due to lack demand and slowdown in
economy, price for material gets increased. Firm can purchase material in bulk in order
to keep cost in control
Material usage- This variance is used to identify that firm use material with determined budget
or not. Negative variance indicates that firm excessively use materials for the
manufacturing of goods and services. Firm can evaluate its earlier production numbers
and material used for manufacturing same. On the basis of evaluation firm will be able
to make accurate estimate and variance will not comes in existence.
Sales Volume- It is a variance that indicate the actual sales that firm made relative to budgeted
sales. The sales volume is negative because firm make an overestimation of the sales.
Hence, firm can do demand analysis and forecasting by using reliable techniques.
Sales Price- This variance indicates the actual sales price and budgeted sales price. Here price in
the budget and actual are same. Hence, there is no issue on sales price of the product.
(Good)
TASK 4
3.1 Assessment of source and structure of trial balance
Information for trial balance is taken from the ledger account. It is a statement in which
different accounts are prepared related to the personal and real account (Davies and Crawford,
2011). By taking final balance of the ledger accounts, a trial balance is prepared. It is trial
balance by using which final statements are prepared. These statements are used for final
decisions making by the managers. In trial balance there are two sides one is debit and other is
credit and balance of both sides remain same. Hence, in this accounts are verified.
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3.2 Adjustments in financial statements
Table 3: P&L statement of R.riggs
Particulars
Sales 157165
Less Cost of goods sold: 94520
Gross profit 62645
Discounts received 160
Interest received 50
GP 62855
Less Expenses:
Wages and salaries 31740
Rent 3170
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Illustration 1: Format of trial balance
(Source: Davies and Crawford, 2011)

Discounts allowed 820
Van running costs 687
Bad debts 730
Doubtful debt provision 91
Depreciation 1630
Accrued expenses 200
Net Profit 23787
Table 4: Balance sheet of Riggs
Fixed assets
Office furniture & Van 7175
Less depreciation 1630
5545
Current Assets
Stock 2400
Debtors 12316
Less provision for doubtful debts 496
11820
Prepaid expenses 230
Cash at bank & hand 4274
18724
Total Assets 24269
Current liabilities
Creditors 5770
Accruals 412
6182
Financed by:
Capital 11400
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Add net profit 23787
Less drawings 17100
18087
24269
By following adjustments, changes are done in the given financial statements. Following
are the entries for the given business transactions.
Adjustment entries
Furniture A/C 525
To Mr X 525
Cash A/C 50 (Interest was received in the bank)
To interest 50
Accrued expenses A/C 200
To cash 200
Impact of entries on assets, liability and profit:
 Furniture- With the purchase of furniture assets, cost of the firm is increased and due to
this reason, asset side of the relevant financial statement gets increased by 525. On the
other hand, transaction does not affect liability side of balance sheet. There was no
impact on profit of the mentioned firm.
 Interest- Due to receipt of interest, cash amount increases in the balance sheet. There was
no change in the liability side of balance sheet. Interest amount is also shown in income
statement and as a result, net profit gets increased by 50.
 Accrued expenses- Accrued expenses of 200 are shown in the balance sheet and due to
this reason; liability of the firm gets increased. Accrued expenses are also included in
income statement. On the other hand, net profit gets increased by 200. Hence, profit and
liability of the firm both get increased.
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(Good)
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REFERENCES
Books & Journals
Bakan, J., 2012. The corporation: The pathological pursuit of profit and power. Hachette UK.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Davila, T., Epstein, M. and Shelton, R., 2012. Making innovation work: How to manage it,
measure it, and profit from it. FT press.
De Mooij, R.A., 2012. Tax Biases to Debt Finance: Assessing the Problem, Finding Solutions*.
Fiscal Studies. 33(4). pp.489-512.
Dekker, R. and et.al., 2013. Reverse logistics: quantitative models for closed-loop supply chains.
Springer Science & Business Media.
Kim, I. J. and et.al., 2010. Foreign investors and corporate governance in Korea. Pacific-Basin
Finance Journal. 18(4). pp.390-402.
Kim, N. S. and Van Wee, B., 2011. The relative importance of factors that influence the break-
even distance of intermodal freight transport systems. Journal of Transport Geography.
19(4). pp.859-875.
Knight, F. H., 2012. Risk, uncertainty and profit. Courier Corporation.
Lauwo, S. and Olatunde, J., 2010. The Role of Auditors in Nigerian Banking Crisis.
Accountancy, Business and the Public Interest. 9. pp.159-204.
Luo, M., 2011. A bright side of financial constraints in cash management. Journal of Corporate
Finance. 17(5). pp.1430-1444.
Nussbaum, M. C., 2012. Not for profit: Why democracy needs the humanities. Princeton
University Press.
Zhuang, L. and et.al., 2011. Cost-effective production of Bacillus thuringiensis biopesticides by
solid-state fermentation using wastewater sludge: Effects of heavy metals. Bioresource
technology. 102(7). pp.4820-4826.
Online
Accounts receivable collection period (Day sales outstanding). 2016. [Online]. Available
through: <http://www.accountingtools.com/receivables-collection-period>.[Accessed on
4th February 2016].
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