Analysis of J. Prep's Financial Performance: Accounting Report

This report analyzes the financial performance of J. Prep, a clothing retail store operating under a franchise model. The analysis focuses on the company's cash flow issues despite good sales, employing ratio analysis to assess the store's initial performance. The report includes the development of balance sheets and income statements for October and November, as well as T-accounts for December, and evaluates the impact of a loan taken to address cash obligations. The financial performance is evaluated using various ratios, including gross profit, net profit, return on assets, return on equity, inventory turnover, and asset turnover. The report concludes with recommendations to improve liquidity by focusing on cash sales and assessing the overall improvement in performance, highlighting the positive impact of the loan on the company's cash management cycle and overall financial health. The report also includes references to relevant financial accounting literature.

Financial Accounting
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Introduction
The present report is developed for carrying out an analysis of the financial performance
of J.Prep that is a clothing retail store carrying out its business through a franchise model. The
company at present is facing the issue of declining cash inflows in one of its store despite of the
good sales realized. As such, the report provides an assessment of the initial performance of the
store with the use of ratio analysis technique. Also, it has presented the development of balance
and income sheet for the
company for the month in which it faced credit crunch. In addition to this, the company has
taken the loan form a saving bank to meet the cash obligations. The report in this context, it
examines whether the decision is accurate to improve the operating management cycle of the
company.
J. Prep Company (A)
Answer 1: Preparation of J. Prep Balance Sheet as of November, 30
Profit and loss Account (October) (J. Prep)
Particulars Amount
Sales $ 80,000.00
Less: Cost of Sales $ 45,000.00
Gross Profit $ 35,000.00
Depreciation $ 1,500.00
Rent $ 15,000.00
Credit Card Fees $ 3,000.00
Wages $ 8,000.00
Utility $ 2,000.00
Net Profit $ 5,500.00
Balance Sheet (J. Prep)
as on 31 October
Liabilities Amount Assets Amount
Inventory $ 195,000.00
Equipment 180000
Less: Accu. Depreciation 1500 $ 178,500.00
Contributed Capital $ 400,000.00 Cash $ 32,000.00
Retained Earnings $ 5,500.00
$ 405,500.00 $ 405,500.00
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Profit and loss Account (November) (J. Prep)
Particulars Amount
Sales $ 130,000.00
Less: Cost of Sales $ 70,000.00
Gross Profit $ 60,000.00
Depreciation $ 1,500.00
Rent $ 15,000.00
Credit Card Fees $ 5,000.00
Wages $ 11,000.00
Utility $ 2,000.00
Salary $ 10,000.00
Net Profit $ 15,500.00
Balance Sheet (J. Prep)
as on 30 November
Liabilities Amount Assets Amount
Inventory
$
240,000.00
Equipment 180000
Less: Accu. Depreciation 3000
$
177,000.00
Contributed Capital
$
400,000.00 Cash
$
4,000.00
Retained Earnings
$
21,000.00
$
421,000.00
$
421,000.00
Answer 2: Financial performance of J. Prep in month of October and November
In order to analysis the financial performance of J. Prep it has been decided to use ratio
analysis.
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Ratios October
Novembe
r
Gross profit 43.75% 46.15%
Net profit 6.88% 11.92%
Return on assets 1.36% 3.68%
Return on Equity 1.38% 3.88%
Inventory Turnover ratio 0.41 0.54
Asset Turnover ratio 0.20 0.31
The financial performance of J. Prep can be evaluated with the use of technique of ratio
analysis that provides an insight into its financial health. The results of the profitability ratio’s
such as gross profit, net profit, return on assets and return on equity has depicted that company’s
profitability has increased over the first two months of operations. Also, its efficiency analysis
with the use of calculation of ratio’s such as inventory turnover and asset turnover ratio that its
ability to utilize assets for realizing sales has been improved. The financial leverage of the
company is also assessed by the use of debt-equity ratio and it can be stated that it is adopting
higher use of equity in its capital structure (Damodaran, 2011).
Answer 3: Operating Cycle of J. Prep
It can be stated from the overall analysis of the case study that Mr. Larsen is not able to
manage effectively the cash position of J.Prep in the franchise model. The company is largely
realizing sales on credit basis to the customers. Thus, despite of realizing higher sales within the
store there is shortage of liquidity due to which the company is currently facing the risk of not
effectively meeting its financial obligations in the future context. In this context, it is
recommended to the company to improve its liquidity position by improving the cash flows by
realizing cash sales rather than emphasising promoting sales to the customers on credit basis
(Davies and Crawford, 2011).
Conclusion
It can be concluded from the overall analysis that the retail store of Mr. Larsen operating
under the franchise of J.Prep is facing the issue of cash crunch. The loan taken by Mr. Larsen for
overcoming the cash crunch has resulted in improving the cash management cycle of the
company. The financial ratio analysis of the store performance over the initial two months of
establishment has depicted that it has good profitability but its efficiency in turning inventory to
sales is not adequate.
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J. Prep Company B
Answer 1: Balance Sheet as on November, 30
Balance Sheet (J. Prep)
as on 30 November
Liabilities Amount Assets Amount
Inventory
$
240,000.00
Contributed Capital
$
400,000.00 Equipment 180000
Less: Accu. Depreciation 3000
$
177,000.00
Cash
$
4,000.00
Retained Earnings
$
21,000.00
$
421,000.00
$
421,000.00
Answer 2: T Accounts of J. Prep
Contributed Capital
Date Debit Amount Date Credit Amount
01-
Dec Balance B/D
$
400,000.00
31-
Dec Balance b/f
$
400,000.00
Retained Earnings
Date Debit Amount Date Credit Amount
01-
Dec Balance B/D
$
21,000.00
31-
Dec Profit and loss
$
36,050.00
31-
Dec Balance b/f
$
57,050.00
Inventory
Date Debit Amount Date Credit Amount
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01-
Dec Balance B/D
$
240,000.00
31-
Dec
Cost of Goods
Sold
$
105,000.00
31-
Dec Vendor
$
50,000.00
31-
Dec Balance B/f
$
185,000.00
$
290,000.00
$
290,000.00
Equipment
Date Debit Amount Date Credit Amount
01-
Dec Balance B/D
$
180,000.00
31-
Dec Balance B/F
$
180,000.00
Accumulated Depreciation
Date Debit Amount Date Credit Amount
01-
Dec Balance B/D
$
3,000.00
31-
Dec Depreciation
$
1,500.00
31-
Dec Balance B/F
$
4,500.00
Cash
Date Debit Amount Date Credit Amount
01-
Dec Balance B/D
$
4,000.00
01-
Dec Bank Loan
$
30,000.00
01-
Dec Rent
$
15,000.00
X
Dec Cash
$
200,000.00
X
Dec Credit Fee
$
8,000.00
15-
Dec Wages
$
5,000.00
30-
Dec Utilities
$
3,000.00
31-
Dec Wages
$
5,000.00
Salary
$
6,000.00
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31-
Dec Balance B/F
$
192,000.00
$
234,000.00
$
234,000.00
Bank Loan
Date Debit Amount Date Credit Amount
01-
Dec Cash
$
30,000.00
31-
Dec Balance B/F
$
30,000.00
Rent
Date Debit Amount Date Credit Amount
01-
Dec Cash
$
15,000.00
31-
Dec
Profit and loss
account
$
15,000.00
Sales
Date Debit Amount Date Credit Amount
31-
Dec
Profit and
loss account
$
200,000.00
X
Dec Cash
$
200,000.00
Credit card Fees
Date Debit Amount Date Credit Amount
X
Dec Cash
$
8,000.00
31-
Dec
Profit and loss
account
$
8,000.00
Wages Expenses
Date Debit Amount Date Credit Amount
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15-
Dec Cash
$
5,000.00
30-
Dec Cash
$
5,000.00
31-
Dec
Profit and loss
account
$
10,000.00
Utilities Expenses
Date Debit Amount Date Credit Amount
30-
Dec Cash
$
3,000.00
31-
Dec
Profit and loss
account
$
3,000.00
Vendor Account
Date Debit Amount Date Credit Amount
31-
Dec Inventory
$
50,000.00
31-
Dec Balance b/F
$
50,000.00
Cost of Good Sold
Date Debit Amount Date Credit Amount
31-
Dec Inventory
$
105,000.00
31-
Dec
Profit and loss
account
$
105,000.00
Salary Account
Date Debit Amount Date Credit Amount
31-
Dec Cash
$
6,000.00
31-
Dec
Profit and loss
account
$
6,000.00
Depreciation
Date Debit Amount Date Credit Amount
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31-
Dec Depreciation
$
1,500.00
31-
Dec profit and loss
$
1,500.00
Tax Expenses
Date Debit Amount Date Credit Amount
31-
Dec Tax Liability
$
15,450.00
31-
Dec profit and loss
$
15,450.00
Tax Liability
Date Debit Amount Date Credit Amount
31-
Dec Bal B/F
$
15,450.00
31-
Dec Tax Expenses
$
15,450.00
Answer 3: Balance Sheet as on November, 30
Profit and loss Account for month of Dec (J.
Prep)
Particulars Amount
Sales $ 200,000.00
Less: Cost of Sales $ 105,000.00
Gross Profit $ 95,000.00
Rent $ 15,000.00
Credit Card Fees $ 8,000.00
Wages $ 10,000.00
Utility $ 3,000.00
Depreciation $ 1,500.00
Salary $ 6,000.00
Total Expenses $ 43,500.00
NPBT $ 51,500.00
Less: Tax @ 30% $ 15,450.00
Net Profit $ 36,050.00
(Krantz, 2016)
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Balance Sheet (J. Prep)
as on 31 December
Liabilities Amount Assets Amount
Tax Expenses
$
15,450.00
Bank loan
$
30,000.00 Inventory
$
185,000.00
Contributed Capital
$
400,000.00 Equipment 180000
Vendor
$
50,000.00 Less: Accu. Depreciation 4500
$
175,500.00
Cash
$
192,000.00
Retained Earnings
$
57,050.00
$
552,500.00
$
552,500.00
(Moles and Kidwekk, 2011)
Answer 4: Decision of Mr Larson
Yes decision to buy the loan of $30000 was good as it helped to provide sufficient
liquidity to the company at the starting of December month. Yes it also improved the operating
cycle of company as in A case.
Answer 5: Assessment of overall performance
Performance has improved a lot during the month of December and as such there are no
issues found.
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References
Damodaran, A, 2011. Applied corporate finance. John Wiley & sons.
Davies, T. and Crawford, I., 2011. Business accounting and finance. Pearson.
Krantz, M. 2016. Fundamental Analysis for Dummies. John Wiley & Sons.
Moles, P. and Kidwekk, D. 2011. Corporate finance. John Wiley &sons.
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