Peyton Approved Business Expansion Request

The assignment content is about Peyton Approved, a profitable bakery company that uses the accrual accounting system. The company proposes a loan request for business expansion and provides an overview of its accounting system, financial processes, and internal controls. The report includes profitability ratios, which show the company's overall efficiency and performance.

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From:
Date:
Subject:
This proposal is about the company named Peyton Approved which is a profitable
company. It engages in the business of bakery. It uses accrual system of accounting for
recording the financial transactions. Currently Peyton Approved uses only Owners’
Equity for financing its bakery business. The purpose of writing this memo is to request
for a loan for business expansion.
Overview of the Company’s Accounting System
The accrual basis of accounting provides better picture of the profitability status
of a company for any accounting period. Peyton Approved uses accrual method of
accounting where all revenues are recognized in Income Statement when they are earned
(whether cash has been received or not), and expenses are recognized in Income
Statement when they are incurred irrespective of actual payment of such expenses. The
financials discussed here are based on accounting period of three months which means all
ledger accounts were closed and profitability as well as financial position of the company
was ascertained by preparing Income Statement and Balance Sheet of the company. By
using accrual system of accounting it supports responsible practices by relying on the
Matching Principle of accounting i.e., matching revenues to expenses at the time when
such transaction occurs.

Accounting Process and Internal Controls for Cash
Peyton Approved uses strict accounting processes to overcome the error of
omission, error of commission and error of principle in accounting process and for
ensuring accuracy of financial statements of the company. The accounting entries which
record the day to day transactions are checked twice, firstly by the accountant and then by
the internal control of the company, whereas the accounting entries related to the end of
month, adjustment entries, reversing entries and closing entries are checked three to four
times. All the Journal entries are carefully posted and the respective closing balances of
Ledger accounts are transferred to Trial balance. After preparing the trial balance last step
is to prepare Financial Statements. Peyton Approved also has Internal controls for cash
management. These controls prevent mishandling of cash and safeguard against the loss
of cash if the segregation of duties are proper. It is difficult for the smaller businesses to
put in place such internal controls due to less number of personnel in the business but it is
not impossible.
Results of Operations and Strengths and Weaknesses of the Company
The net revenue in Income Statement is favorable which means that Peyton
Approved is doing the profitable business and covering all of its operating and non-
operating costs. The change in capital structure is only requirement for the company to
successfully operate in the long run. Peyton Approved is currently financed by owner’s
equity. This is not sufficient in the long run for the expansion of the company. It requires
both debt and equity in its capital structure for financing its operations. One more
advantage of having debt in capital structure is that the cost of such finance is lower as
compared to that of equity. Profitability ratios show overall efficiency and performance

of the company. It is an analysis of Cost and Revenue of the Company that determine
whether or not company is stable in terms of profitability. The Net profit ratio, Return on
Assets, Return on equity and Total Asset Turnover are commonly used Profitability
ratios.
Particulars Formula Ratios
Net Profit Ratio Net Income / Total Revenue 53.44%
Return on Assets
Net Income / Average Total
Assets 4.80
Return on equity
Net Income / Shareholder's
Equity 65.44%
Total Asset Turnover
Return on Assets /Net Profit
Margin 8.99
Net Profit Margin measures how much profits are produced at given level of
sales. The Return on Total Assets shows how company uses its assets efficiently. Return
on equity shows how the company uses its investor’s fund.
Analysis and Opportunities
Peyton Approved in overall is going in the right direction. This can be ascertained
by profitability analysis. The profitability analysis ratios show that the performance of the
company in terms of profit and efficiency is good. This performance of the company
attracts investors for investing in the company and increases market value of the shares of
company. This will also help in taking the loan from the banks and other financial
institutions.

The purpose of preparing this memo is to request for a loan for business
expansion. The Net Profit Ratio is 53.44% which shows company is also capable for
bearing the fixed financial cost (Interest charges) for taking the loan. The addressees of
this memo are requested to go through each financial aspect of the company in detail and
to ascertain the eligibility of the company for getting such finance.
Thanking You
Sincerely