Management accounting –Making Capital Investment Decision writing service

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Joshua’s Kitchenware Ltd:

 

Joshua studied hotel management many years ago at college. After leaving, he spent two years as a sous-chef at a large hotel in London, but soon grew tired of the hectic pace of work. While on holiday in Italy he bought a very stylish pan from a range of well-designed Kitchenware Ltd. On his return to the UK he decided he would like to buy another pan from the range, but was unable to find a supplier. He made enquiries and discovered that no-one in the UK was currently importing the range. He persuaded his mother to lend him some cash and started a business importing Kitchenware Ltd, initially only from Italy, but as the business developed, from other countries as well.

 

The business has been successful. Joshua has always managed to make a profit, but he is not very careful with money. He spends a lot, and he has never quite been able to follow his original intention, which was to invest part of the profits in expanding the business. Still, he has always prided himself on being able to provide a high standard of living for his family. However, more recently, Joshua has fallen into difficulties. Four years ago his wife, Hermione, discovered that he was having an affair with an Italian sales rep. Horrified and upset, she refused to believe his assurances that the affair was over and that it would never happen again. She turned him out of the house and demanded a divorce. Joshua feels that he has done rather badly out of the divorce. Under the terms of the arrangements made at the time of the divorce Hermione kept the family home, and Joshua has had to pay what he considers to be an unreasonably large sum of maintenance for the three children of the marriage. He now lives in a small rented flat.

 

A few months after the divorce Joshua met up, by complete coincidence, with Charlie, a former friend from college, on a train journey to London. After college Charlie spent several years working as a chef in France and Switzerland, but had now returned to the UK to start a private restaurant school. He is delighted to find that Joshua deals in high quality kitchen supplies, and promises that he will place all his contracts for equipment with Joshua’s business. Charlie and Joshua discover that they are both keen Formula One enthusiasts and after that chance meeting, they see each other regularly at races and social events. Because he knew Charlie at college and considers him to be a good friend, Joshua is quite relaxed about supplying goods on credit. Charlie explains that he will be a bit short of money for the first few months in the new business, but he will pay Joshua whatever he is able to spare: ‘Once the business is on its feet, there’ll be no problem at all….’. Charlie’s business starts up in July 2013, and Joshua supplies all the equipment for the demonstration kitchen in the school at a cost of £23 000. At first the business seems to be doing well, and Charlie is so confident about it that he starts up another, bigger, branch in another city only six months later, in December 2013. Again, Joshua supplies all the equipment, this time at a cost of £27 600, although this time he does say to Charlie that he would like to have some of the debt paid off soon. Charlie has not been able to pay him anything at all in the first few months of his business. As the months go by, Joshua notices that he’s not seeing Charlie around so much, and even starts to suspect that Charlie is avoiding him.

Joshua, in the meantime, has his own money troubles. Hermione has pestered him for extra money to take herself and the children on an exotic cruise. Because Joshua still feels guilty about the failure of the marriage he gives in and pays over £7500 out of his drawings from the business. Feeling depressed, Joshua decided to cheer himself up by going on a skiing holiday in Colorado with his new girlfriend. Somehow, the drawings from the business seem to be much higher, and, for the first time ever, Joshua needs a business overdraft. The bank manager is happy to oblige and, because interest rates are low, Joshua is not really worried about it. He knows that his cash position will be back to normal as soon as Charlie pays him.

 

In late October 2014 Joshua is alarmed to find an article in the trade press about Charlie. Headlined ‘Charmer Charlie in closure chaos’, the article reports the sudden closure of the restaurant schools. Irate clients, all of whom had paid in advance for courses, have been trying to gain entry to the schools whose doors are permanently locked. Joshua rings the journalist responsible for the article. Off the record, the journalist confirms that this latest enterprise is not the first business failure that Charlie has experienced. He is notorious in some circles for his ability to charm people into lending him money. Several years ago, he started a restaurant business with money that he persuaded friends to contribute. The restaurant was not a success and Charlie abroad still owed his ex-friends large sums of money. There is some speculation now that the Fraud Squad is interested in Charlie’s activities.

 

Joshua rings Charlie on his business telephone line, but the line does not appear to be working. There is no reply from Charlie’s mobile phone. In desperation he rings a chef who has been working at one of the schools. The chef is extremely angry. He hasn’t been paid for over a month and he has no idea of Charlie’s present location.

 

Joshua is not very good at keeping track of his financial affairs. A bookkeeper keeps the basic records of the business and, once a year, his accountant, Frank, prepares a income statement and a statement of financial position at 31 December. At this point, in October 2014, Joshua really does not know how the business stands, but he is aware that he is close to the business overdraft limit of £24 000. For the first time in the history of the business his Italian supplier, Giovanni, has rung him asking politely when he is likely to be paid. Joshua does not have an immediate answer to the question, but tells Giovanni that he will call him back in a couple of days.

 

Joshua visits Frank with a list of balances prepared by the bookkeeper as at the end of September 2014. Joshua is, by now, extremely anxious and asks Frank to prepare financial statements as at the end of September as soon as possible, and to advise him on the impact there will be upon the business if the money owed by Charlie cannot be recovered. Joshua is desperate to have Frank’s opinion on whether or not the business can survive.

 

 

The list of balances is as follows:

£

Interest paid and bank charges	1,560
Revenue	250,836
Delivery expenses	2,612
Inventory at 1 January 2014	17,881
Trade payables	51,760
Discounts allowed	870
Discounts received	183
Import duties related to purchases	1,536
Purchases	140,255
Premises rental and other charges	31,580
Overdraft	23,861
Trade receivables (including £50 600 owed by Charlie)	93,242
Staff wages	23,391
Administration charges	7,726
Capital at 1 January 2014	64,084
Drawings	61,760
Non-current assets	8,311
Closing inventory at 30 September 2014	19,870

 

The bookkeeper sends a note with the balances to say that the telephone bill for the quarter to 30 September 2014 still needs to be paid and is not included in the total for administration charges above. The bill is for £422.

 

In addition, Frank thinks that it would be sensible to make an accounting adjustment for an accrual for his own fees. He has not sent a bill to Joshua for a while and he estimates that about £1300 will be due for tax work already done and for the work of preparing these interim accounts.

 

These two items (£422 + £1300) will create a total accrual to be included in liabilities in the statement of financial position of £1722.

 

 

 

Frank prepares financial statements without any adjustment for the amount of the receivable due from Charlie, as follows:

 

Joshua Kitchenware Ltd: Income statement for the 9 months ending 30 September 2014 £
Revenue	250 836
Cost of sales
Opening inventory	17 881
Add: purchases	140 255
import duties related to purchases	1 536
141 791
159 672
Less: closing inventory	(19 870)
(139 802)
Gross profit	111 034
Discounts received	183
111 217
Expenses
Staff wages	23 391
Premises rental and other charges	31 580
Administration charges	7 726
Add: accrued telephone expense	422
8 148
Accrued accountancy charges	1 300
Discounts allowed	870
Interest paid and bank charges	1 560
Delivery expenses	2 612
(69 461)
Net profit	41 756

 

 

 

 

Joshua Kitchenware Ltd: Statement of Financial Position as at 30 September 2014 £
ASSETS
Non-current assets	8 311
Current assets
Inventory	19 870
Trade receivables	93 242
113 112
121 423
CAPITAL AND LIABILITIES
Capital
Opening capital balance 1 January 2014	64 084
Add: net profit for the year	41 756
105 840
Less: drawings	(61 760)
Closing capital balance 30 September 2014	44 080
Current liabilities
Trade payables	51 760
Accruals	1 722
Bank overdraft	23 861
77 343
121 423

 

 

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