COMPANY BACKGROUND
- Pets Paradise sells pet foods, toys, and accessories bought from a number of suppliers who source the goods from local and overseas manufacturers. The goods are sold to several pet shops and veterinary clinics throughout Australia.
- Pets Paradise Pty Ltd has been in business in Perth since July 2016. The firm operates one retail store, which was opened by Paula Granger. As the business expanded, Paula formed a proprietary company to operate the business. The company’s share capital consists of 210,000 ordinary shares that are owned by various members of the Granger family.
- The store is open seven days a week from 9 am to 5 pm and is staffed by two sales employees. The company sells pet food and accessories directly to the public. In addition, various firms and organisations purchase directly from the company on credit.
- The company also employs two office staff who work a five-day week from Monday to Friday. One office staff member is responsible for overseeing the daily running of the business, including inventory ordering; the other maintains the company’s accounting records.
ACCOUNTING SYSTEM
The company has a financial year-end 30 June and prepares to adjust entries only at the end of the year. The firm uses the following journals to maintain its accounting records:
- Sales Journal: to record all credit sales of inventory
- Purchases Journal: to record all credit purchases of inventory
- Cash Receipts Journal: to record all cash receipts
- Cash Payments Journal: to record all cash payments
- General Journal: to record all transactions other than the above
Pets Paradise maintains Accounts Receivable and Accounts Payable subsidiary ledgers.
The company maintains a general ledger to record the increases and decreases in each asset, liability, owner’s equity, revenue, and expense account. Subsidiary ledgers are used to record the separate details of Accounts Receivable and Account Payable. The company maintains a periodic system to account for its inventory. ALL inventory is marked up by 25% on cost.
For control purposes, any freight charged on goods purchased is processed in a separate “freight inwards” account.
GOODS AND SERVICES TAX (GST)
The company is registered for GST at the rate of 10% and is required to pay GST on its purchases and to collect GST when making sales. The company uses a GST paid account for GST on purchases and a GST collected to account for GST on sales (for manual records). All transactions provided for the month of June exclude GST. Therefore, you must remember to account for GST on the supply of goods and services to customers and in goods and services purchased from suppliers, when recording the transactions for June for the company.
YOUR ASSIGNMENT
The firm’s in-house accountant has gone overseas for one month. You have been hired by Paula Granger to carry out the accounting duties in the accountant’s absence. This assignment provides you with the unadjusted trial balance at the end of May and requires you to record typical transactions for a retail business for the last month of the financial year. Once these transactions have been recorded and posted, you are required to complete the accounting cycle by journalising and posting adjusting and closing entries, and preparing financial statements.
REQUIRED:
- Record the June transactions in the appropriate journal: sales, purchases, cash receipts, cash payments, and general. Blank journals, ledgers, and financial statements are on LMS under the assignment tab, for you to use to complete the assignment. The assignment is to be typed not handwritten as are working papers.
- Post the journals to the general and subsidiary ledgers. New accounts should be added as needed
- Record the adjusting journal entries required for the year ended 30 June 2020 in general journal format. You should use brief narrations to explain your entries. Use the worksheet provided in the blank documents to record the adjusting entries and prepare financial statements for checking.
- Prepare the following:
- A fully classified Income Statement for the year ended 30 June 2020. This Statement must also show comparative figures for the previous year.
- A fully classified Balance Sheet as of 30 June 2020. This statement must also show the comparative figures for the previous year. These financial statements should be typed and professionally presented.
- Prepare a post-closing trial balance, and determine whether the subsidiary ledgers agree with the control accounts in the general ledger
- A potential investor interested in purchasing shares in the company has approached you to undertake an analysis of the financial statements you have prepared in part 2 above.. As part of this analysis, you are required to:
- Calculate the following ratios for both 2019 AND 2020. You are required to compare the results for the 2 years and also compare with the industry average.
- RATIO INDUSTRY AVERAGE
- Return on equity 8%
- Net profit margin 7%
- Current ratio 2:1
- Debt to total assets 35%
- Average collection period 15 days
- Discuss the results of your ratio calculations performed in part (a) above and the trend in the profitability, liquidity, and solvency of the company over the past 2 years compared with the industry average.
- Provide a recommendation to your investor friend whether they should invest in the company or not. Provide reasons for your recommendation.
- As part of your analysis, explain how industry average ratios can be obtained and the drawbacks to using industry averages as a standard for comparison.
