ACC 201 FINAL PROJECT PART I ACCOUNTING CYCLE REPORT 1
Southern New Hampshire University
Peyton Approved makes all natural and hypoallergenic foods for dogs.The company has only been in operation for the past three months andthe financial statement for the month of September show the company’sfinancial position. The purpose of this memorandum is to report onPeyton’s Approved accounting system since the company started itsoperations.
Theaccounting cycle refers to the steps that are involved in theproduction of financial statements in the accounting process. Theaccounting cycles vary due to the nature of businesses and otherfactors however, most businesses have accounting cycles that rangefrom a month, a quarter, semi-annually or at the end of theaccounting year. In Peyton Approved case, their accounting cycle isquarterly as their financial statements are produced every threemonths. There are eight steps in an accounting cycle.
Anaccounting system is a set of organized procedures, methods,procedures and controls set up to record, classify, summarize andinterpret financial information to the management of the company sothat they can arrive at the right decision. Peyton Approved utilizesthe accrual basis of accounting for its business transactions. Theaccrual basis of accounting recognizes revenues when it is earned andexpenses expenditures when they are used up in business. The accrualbasis for accounting is preferred to the cash basis of accountingbecause a small business like Peyton Approved needs cash to meets itsshort term obligations. Embracing the cash basis of accounting wouldrequire Peyton to recognize revenue when it is received from itscustomers and that the expenses are paid when the bills become due.However, due to the nature of the business environment PeytonApproved operates in, the accrual basis is more appropriate becausesome expenses such as rent may be required to be pre-paid while somecustomers may prefer to have services offered to them and pay at alater date. This type of accounting basis ensures that the businesscontinues to operate and that the stakeholders of the business do notraise questions on the going concern of the business. In addition,the practice ensures that responsible accounting is maintained in thecompany. This is because for example, revenues are recorded whenearned and not when cash is received. This reduces the risk of fraudas money received from customers is not only recorded when cash isreceived.
PeytonApproved has put up a number of business strategies in order toensure responsible accounting is adhered to. First, the business onlyhires competent and qualified accountant who assist in preparing thecompany’s financial statements. The accountants not only have tohave the right qualifications but also need to have worked for atleast 2 years as accounts. This will ensure that they are conversantwith the required accounting framework used at Peyton Approved andalso required for financial reporting. The management has alsoaccepted their responsibility in preparing financial statements whichrepresent a true and fair view of the company’s financial position.
Themanagement of Peyton Approved is responsible for setting up theinternal controls of the company. Since the company uses an accrualbasis of accounting, cash is recorded when revenue is earned or whenexpenses are incurred. The management has set up three controlmeasures to ensure that the proper cash is reported. There is thesegregation of duties such that the individual who records the cashdoes not receive the cash and therefore the system creates a checkand balance for the cash. Cash payments and remittances are only madevia approval and only authorized personnel make the disbursement onbehalf of the company. Finally, the company has a job rotation policyand all employees are required to work at a different department atthe end of every quarter. The financial statements of the company areprepared at the end of every quarter and any discrepancies in cashand other items are likely to be discovered at the end of the reviewengagement every three months.
Asfar as the company’s operations are concerned, Peyton Approved isdoing very well. According to the income statement, the companyreported sales of $ 60,221 for the first quarter. The cost of saleswas only $ 157.60 hence making the company’s gross profit $60,063.40. However, Payton Approved needs to trim its expenses sincethey reduced the company’s sales by $ 27,879.33. This suggests thatthe company was efficient in its operations but the company’srecurrent expenditure is unsustainable. However, the company stillmanaged to make a net profit of $32,184.07 for the first quarter,which meant that over half of the revenue translated into company’sprofit. Peyton Approved also has enough cash to settle its short termobligations. Its cash balance is $ 47,896.75 compared to its currentliabilities of $ 7,630. This means that the company can expand itsoperations without the need to look for external sources offinancing.
Inthe first quarter of operations, Peyton Approved registeredimpressive result on its financial statements. The statements suggestthat the company reported a gross profit of $ 60,063.40 and a netprofit of $ 32,184.07. This means that the company’s gross profitmargin and net profit margin were 99.74% and 53.44% respectively.This means that Peyton Approved did an excellent job of keeping itsoperations cost down but it failed to manage its expenses which wereoff the chart. Peyton Approved needs to cut down on its expenses byreducing the expenses on three main items: baking supplies, rent andsalaries. The three items make over 92.7% of the company’sexpenditure. The statement of financial position of the other hand,reveals that the company is very liquid. The ratio of current assetsto current liabilities is 8.13: 1. This means that the company canmeet its short term obligations when they become due. Peyton’sApproved cash at hand balance suggests that the company can investsits extra cash in short term investments or can expand its operationswith ease.
Atthe moment, Peyton Approved seems to be going in the right direction.But it should consider moving to a cheaper premise and negotiating onthe length of the lease so that the can save some money on rent. Thebaking supplies were a one off expenditure and it is likely that theymay not have to purchase any new supplies in the short-term.Therefore, the company’s net profit for the second quarter shouldshow better results. The first quarter results suggest that thereopportunities for the company’s product. The results are especiallyencouraging considering that the cost of goods was only 0.26% of thecompany’s sales. Peyton should consider expanding its operations inorder to take advantage of economies of scale which should increasethe company’s bottom line.
Nobles, T. L., Mattison, B. L., Matsumura, E.M. (2014). Horngren’s financial andmanagerial accounting (4thed.). Upper Saddle River, NJ: Pearson Education, Inc.