Management Accounting Assignment 2017: Electroworld Business Overview

This management accounting assignment presents a business plan for 'Electroworld.com,' a proposed electronics and home appliances business. It details the selection of a limited liability company (LLC) as the legal structure, highlighting advantages such as asset protection and tax benefits. The report explores various financing options, including a mix of own and loan capital, factoring, and crowdfunding. It provides examples of projected financial statements and emphasizes the importance of maintaining specific books of accounts for internal control and audit purposes. The analysis covers financial statement analysis tools like ratio analysis and variance analysis. Finally, it discusses profit distribution factors, considering cash availability, investment opportunities, and tax implications. The report draws on various references to support its arguments, providing a comprehensive overview of the business planning and accounting principles.

2017
Management Accounting Assignment

1
By student name
Professor
University
Date: 31 August, 2017.
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Contents
Point no 1…………………………………………………………………...3
Point no 2…………………………………………………………………...4
Point no 3…………………………………………………………….....….5
Point no 4…………………………………………………………….....….6
Point no 5…………………………………………………………….....….8
Point no 6…………………………………………………………….....….9
Point no 7…………………………………………………………….....…10
Refrences.....……………………………………………………………….11
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Point no 1
Starting a new business is not easy and the trickiest ask is choosing the business to venture into.
Different businesses have different challenges and different rewards. A right product or service must be
chosen in the first place which needs to be marketed well in order to earn profits and for business to last
longer. Understanding the customer demand, the market analysis, the potential target customers and
lifestyle today, I would be starting a business in electronics and home appliances. This has been chosen
as home appliances and electronics have become a ultimate necessity in the nine to five life of most of
the professionals as they spend of their times on TVs, Laptops, music systems, mobiles, etc. (Anon., n.d.)
 Name of the business would be “Electroworld.com”. The reason of selecting such a name for the
business is it being catchy and the world being so internet oriented and internet bound, it
catches minds of the listeners and viewers immediately.
 Products and services offered: Most of the electronic products would be at offer including video
system, music system, television, laptop, etc.
 Legal form: The legal form chosen would be a limited liability incorporation or company
consisting of 2 partners, one partner being my friend who has good business contacts with the
vendor, customer, banks, etc. and the other being me.
 Option of merchandising or manufacturing: We would go with manufacturing of these goods.
 Option of retail or wholesale outlet: We would be going with the wholesale outlet because of
the good margins being available as per the market trend. (Bae, 2017)
 Size of the business: The expected or the planned size of the business is to be around $ 400000
initially with major portion being on the capital expenditure and the other being on the current
assets.
 Industry: The industry which we would be venturing into will be manufacturing industry.
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Point no 2
As mentioned in the first part the legal form of the business started would be incorporated
company, a LLC. There are various advantages, which it offers like:
 Protection of personal assets: Both the partners or owners will have limited liability towards the
debts of the company and there would be separate legal position of both as a result, the
personal assets would be prospected to be confiscated in case of legal dispute or dissolution.
(Solicitors, 2016)
 Authority, legitimacy and credibility of the name: Once “Inc.” or LLC comes after the name of the
company, the name carries the weight and credibility in the market; it cannot be copied by
anybody else. This not helps in building the brand name of the company but also gives a legal
protection to the company.
 Existence until perpetuity: Unlike partnership or proprietorship business, this continuous to be
in existence even after the death of the partner or owner and the management just changes.
 Tax benefits: Generally, the rate of tax on proprietor is the same as that of the LLC, in addition to
providing the protection to the personal assets. The profits / losses of an entity is generally gets
reported as the personal gains / losses in the tax sheet of the individual however, the same
could be avoided by electing the presentation as corporation. However, in corporation, the
individual is taxed on both the personal as well as corporation front. However, one can choose
tax status as Subchapter S and avoid double taxation. (Anon., 2016)
 Deduction of expenses: All the expenses pertaining to business are allowed as deduction while
calculation of tax to be paid on the profits earned by the entity
 Other benefits include quick decision-making and distribution of power and capital.
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Point no 3
In the present era, there are multiple options via which the business can be financed. Some of
them which are relevant and suitable as per the business needs are:
 Mix of own capital and loan capital: This is the most reliable and widely used means of financing
as some of the amount is funded by the investors themselves which is initially free of cost and
the other part being financed via a loan from the bank or financial institution which comes at an
interest rate of 6-8% which will easily be beaten by the rate of returns of the business.
(Kamuriwo, et al., 2017)
 Factoring/ advances from the invoices: This means of funding is being widely used for the
current portion or working capital management where the service provider pays the business
for the sale done to the customer on advance cutting some portion as the interest and
commission. This can be effectively used once the business starts billing to the customer.
 Crowdfunding or online lending: These 2 means of financing have gained immense popularity in
the recent times where the online sites like Kickstarter, act arrange funds from a group of
investor who want to invest in a single prospective business and this amount is then given as a
business loan and a negligible processing fees is charged. This is known for speed and quick
decision-making. (Qi, et al., 2017)
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Point no 4
One of the financing options as chosen in the previous part was loan from bank or financial
institution. Once the loan request is initiated, the banks generally ask for a set of documents including
the projected balance sheet, projected income statement, the tax returns of the last 2-3 years for the
individuals applying for loan, credit worthiness statement from a credit rating company, etc. An example
of the project balance sheet and income statements is shown below: (Das, 2017)
Electroworld.com
Cash Flow Projections - Income Statement
© www.excel-sk ills.com
Year 1 Year 2 Year 3
Turnover 300,000 369,000 435,420
Cost of Sales 126,000 160,515 178,522
Gross Profit 174,000 208,485 256,898
Gross Profit % 58.0% 56.5% 59.0%
Expenses
Accounting Fees 240 500 660
Advertising & Marketing 4,000 1,600 5,000
Bank Charges 300 321 340
Cleaning Expenses 600 642 681
Computer Expenses 400 428 454
Consumables 190 460 760
Electricity & Water 1,200 1,284 1,361
Entertainment 800 856 907
Equipment Hire 600 642 681
Insurance 1,000 1,070 1,134
Legal Fees 450 482 510
Motor Vehicle Expenses 3,600 3,852 4,083
Postage 200 214 227
Printing & Stationery 550 589 624
Professional Fees 1,700 1,819 1,928
Rent 12,000 12,840 13,610
Repairs & Maintenance 1,100 1,177 1,248
Salaries & Wages 24,500 26,215 27,788
Security 1,300 1,391 1,474
Subscriptions 580 621 658
Telephone & Fax 2,800 2,996 3,176
Training 1,800 1,926 2,042
Uniforms 500 535 567
Total Expenses 60,410 62,459 69,913
Depreciation 32,129 32,129 32,129
Profit / (Loss) before Interest & Tax 81,461 113,898 154,857
Interest 13,250 13,250 13,250
Taxation 14,663.06 21,982.28 32,519.91
Profit / (Loss) for the year 53,548 78,666 109,087
Net Profit % 17.8% 21.3% 25.1%
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Electroworld.com
Projected Balance Sheet
Historical Projected Projected Projected
Year 0 Year 1 Year 2 Year 3
Assets
Current Assets
Cash in bank $ 33,676 $ 92,587 165262 175202
Accounts receivable - 20,774 72472 156252
Inventory 76,900 52,720 57373 72252
Prepaid expenses 54,455 45,272 52027 46353
Other current assets 10,067 13,622 15199 33735
Total Current Assets $ 175,098 $ 224,975 $ 362,333 $ 483,794
Fixed Assets
Machinery & equipment $ 114,000 $ 114,000 $ 114,000 $ 114,000
Furniture & fixtures 15,600 15,600 15,600 15,600
Leasehold improvements 35,060 35,060 35,060 35,060
Land & buildings 35,290 35,290 35,290 35,290
Other fixed assets 24,952 24,952 24,952 24,952
(LESS accumulated
depreciation on all fixed assets) - (32,129) (64,258) (96,387)
Total Fixed Assets (net of
depreciation) $ 224,902 $ 192,773 $ 160,644 $ 128,515
TOTAL Assets $ 400,000 $ 417,748 $ 522,977 $ 612,309
Liabilities and Equity
Current Liabilities
Accounts payable $ - $ 35,095 73,536 73,638
Interest payable - 13,250 13,250 13,250
Taxes payable - 14,663 21,982 22,520
Notes, short-term (due within 12
months) - 14,353 22,730 67,263
Current part, long-term debt - 12,672 28,672 44,256
Other current liabilities - 14,167 4,141 9,932
Total Current Liabilities $ - $ 104,200 $ 164,311 $ 230,859
Long-term Debt
Bank loans payable $ 265,000 $ 185,000 $ 185,000 $ 185,000
Other long term debt - - - -
Total Long-term Debt $ 265,000 $ 185,000 $ 185,000 $ 185,000
Total Liabilities $ 265,000 $ 289,200 $ 349,311 $ 415,859
Owners' Equity
Invested capital $ 135,000 $ 75,000 $ 95,000 $ 87,363
Retained earnings - beginning - 53,548 78,666 109,087
Retained earnings - current - - - -
Total Owners' Equity $ 135,000 $ 128,548 $ 173,666 $ 196,450
Total Liabilities & Equity $ 400,000 $ 417,748 $ 522,977 $ 612,309
0 (0) (0)
Particulars
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Point no 5
With the introduction of IFRS and other accounting requirements and the need for maintenance
of internal financial control within the organisation, the need for specific books of accounts have
increased. (Minnis & Sutherland, 2016) This serves as the basis for audit opinion by the auditors, the
preparation of the annual accounts of the company basis which both the internal and the external users
of the books of account like the shareholders, creditors, debtors, banks, financial institutions, etc take
important and critical decisions.
The accounting information prepared will include the necessary disclosures on the management
judgements and estimates applied while reporting, depreciation policy used, disclosures of related party
transactions, shareholders information, important transactions entered into by the company during the
year, the important and critical ratios like the current ratio, debt equity ratio, liquid ration, net profit
ratio, return on equity, etc. All the costs would be maintained separately ledger wise so that the proper
control is maintained and reconciliation is done after every period to find out the discrepancies. (Keith &
Cassandra, 2017)
Besides all the above-mentioned procedures, financial and management accounting would be
done in a computerised system using SAP tool and all the necessary activities like cost control, invoicing,
collection, billing, delivery, procurement, etc. would be departmentalized in order to maintain strict
internal control and avoid any chances of fraud or misstatement.
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Point no 6
Financial statement analysis is a very significant tool to be used by the management in taking
important economic and business decisions. It involves tabulating the important information of the
company in order to give a concise view to the mangers to enable quick and efficient decision-making.
Some of its benefits include determining the financial stability and health of the company, the liquidity
position of the company and whether the company would be able to pay back to its creditors in time. Its
shows to the relevant stakeholders how the management has made effective and efficient utilization of
the limited resources in order to maximise the profits. Even the government and the tax and legal
authorities make use of the financial statement analysis in order to check the company’s fiscal measures
the tax to be paid by the company and whether it is a going concern or not. (Goldmann, 2016)
It involves analysis of the income statement, balance sheet and the cash flow statement. The
analytical tools include key ratio analysis, comparison of the actual data from the past quarter or period
and last year, its comparison from the budgeted data or the estimated figures and doing the variance
analysis. It also includes the horizontal and vertical analysis and trend comparison with the industry. All
this helps the management to get the insights, the weak links so that the corrective action can be taken
and control can be increased. (Nakao, et al., 2017)
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Point no 7
Profits distribution in a business is one of the most significant and critical decisions to be taken.
It depends upon the management oversight and planning whether to distribute the profits of not. Some
of these factors are:
 If the cash profits are more with the company and there are no investment opportunities, it
would prefer to distribute the cash. (Michaely & Jacob, 2017)
 In case there is a working capital or other business enhancement requirement, which will
increase the future profits of the business, then the management may think to retaining the
profits in the business and using it for the growth purposes.
 If there exists an expansion opportunity or a reasonable avenue for investment, which will earn
more than the business profits rates, it may consider to invest and not to distribute the profits.
 The other factor, which may be taken into consideration, is the tax to be paid on redistribution
of profit, which unusually increase the tax expenses of the company and hence double taxation.
 In case the debts are due by the company, the management may first think to pay off the same
rather than the distribution of profits to the owners. (Buchanan, et al., 2017)
References
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Anon., 2016. When is a Heads of Agreement legally enforceable?. [Online]
Available at: https://legalvision.com.au/heads-agreement-legally-enforceable/
[Accessed 8th August 2016].
Anon., n.d. (FindLaw, 2016). [Online].
Bae, S., 2017. The Association Between Corporate Tax Avoidance And Audit Efforts: Evidence From
Korea. Journal of Applied Business Research, 33(1), pp. 153-172.
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
Kamuriwo, D. S., Bellavitis, C. & & Hommel, U., 2017. Mitigation of Moral Hazard and Adverse Selection
in Venture Capital Financing: The Influence of the Country’s Institutional Setting. Journal of Small
Business Management, pp. 1-9.
Keith, S. & Cassandra, L., 2017. CULTURAL IMPACT OF INTERNATIONAL FINANCIAL REPORTING
STANDARDS ON THE COMPARABILITY OF FINANCIAL STATEMENTS.. International Journal of Business,
Accounting, & Finance, 11(1), pp. 46-56.
Michaely, R. & Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and
Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222.
Minnis, M. & Sutherland, A., 2016. Financial Statements as Monitoring Mechanisms: Evidence from
Small Commercial Loans. Journal of Accounting research, 55(1), pp. 197-233.
Nakao, S., Oliveira, N. & Nardi, P., 2017. Analysis of the influence of audit firms on disclosure in notes to
financial statements. Nakao, 14(2), pp. 9-14.
Qi, Y., Roth, L. & Wald, J., 2017. Creditor protection laws, debt financing, and corporate investment over
the business cycle. Journal of International Business Studies, 48(4), pp. 477-497.
Solicitors, S., 2016. The Principles of Contract. Contract, p. 13.
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