Advanced Financial Accounting
Part 1
For this first part, you will set up your own fictional business using either GAAP or IFRS standards. In a typed document, accomplish the following:
Provide the name and location of your business
Identify the goods and/or services offered
Identify which accounting standards will be used
Provide a list of accounts (also known as the chart of accounts); your list must include assets, liabilities, equity, revenue, and expense as well as current and long-term assets
Provide beginning balance amounts to each account in the list
Create an accounting journal consisting of a minimum of ten business transactions
Construct basic financial statements based on your transactions
Perform a basic ratio analysis to assess the success or failure of the business
Advanced Financial Accounting
Part 2
Your business is now providing goods and services to people across the world. You have also started working with multiple currencies. In your document, describe how working with multiple currencies can have an effect on financial on financial statements. List the steps you could take to reduce the risk of loss to your business when working with multiple currencies. Combine both parts of the assignment into a single Word document. Your submission should be 6-10 pages, double-spaced, 12-point font, and in Times New Roman. No references are required, but if you choose to use them, these should be cited in APA format.
Advanced Financial Accounting
Sample Solution
Name: Joe’s Bike Shop
Location: Boise, ID
Joe’s Bike Shop offers a variety of bicycles and biking accessories for purchase, as well as repair services.
GAAP accounting standards will be used.
Assets available: Cash, Receivable Accounts, Inventory, Prepaid Expenses
Liabilities: Payable Accounts
Equity: Common Stock
Retained Earnings
Revenue: Sales
Expenses: Cost of Goods Sold
Rent
Utilities
Insurance
Payroll
Beginning balances:
Cash: $1,000
Accounts Receivable: $500
Inventory: $5,000
Prepaid Expenses: $200
Accounts Payable: $1,000
Common Stock: $10,000
Retained Earnings: $0
Advanced Financial Accounting
Journal:
1/1/18: Joe deposited $10,000 into the business checking account, representing his investment of common stock.
1/2/18: Joe paid $500 for repairs to the shop.
1/5/18: Joe purchased $1,000 of inventory from a supplier. Accounts payable is increased by $1,000.
1/7/18: Joe sold $500 of inventory to a customer. Accounts receivable is increased by $500.
1/7/18: Joe collected $250 from a customer. Cash is increased by $250.
1/8/18: Joe paid $250 in rent for the month.
1/9/18: Joe paid $100 in utilities for the month.
1/10/18: Joe paid $50 for insurance for the month.
1/12/18: Joe paid $200 in payroll for the month.
1/15/18: Joe paid $500 to a supplier. Accounts payable is decreased by $500.
Income Statement:
Sales: $500
Cost of Goods Sold: $250
Gross Profit: $250
Expenses:
Rent: $250
Utilities: $100
Insurance: $50
Payroll: $200
Net Profit: $0
Balance Sheet:
Assets:
Cash: $750
Accounts Receivable: $500
Inventory: $4,500
Prepaid Expenses: $200
Total Assets: $6,950
Liabilities:
Accounts Payable: $500
Total Liabilities: $500
Equity:
Common Stock: $10,000
Retained Earnings: $0
Total Equity: $10,000
Total Liabilities & Equity: $6,950
Ratio Analysis:
Profit Margin: 0%
Asset Turnover: 0.071
Return on Assets: 0%
Return on Equity: 0%
Part 2
Working with multiple currencies can have an effect on financial statements in a few ways. First, if a company has revenue in multiple currencies, it must translate that revenue into its functional currency. The translation process can be complex, and different companies use different methods. This can make comparisons between companies difficult. Second, companies must account for any currency risk. Currency risk refers to the possibility that the value of a currency will fluctuate, and that this will have an impact on the value of a company’s assets and obligations. Currency risk can be managed through hedging, but this can also be complex and costly.
The steps you could take to reduce the risk of loss to your business when working with multiple currencies include:
1. Use a foreign currency hedging strategy.
2. Work with a reputable foreign exchange broker.
3. Use a forward contract or currency option to lock in an exchange rate.
4. Diversify your currency exposure by holding a mix of different currencies.
5. Monitor currency markets closely and be prepared to act quickly if needed.
Part 1
- Based on the information provided, Joe’s Bike Shop is not doing well. The profit margin is 0%, meaning that for every dollar of sales, the company is only bringing in enough revenue to cover its expenses. The asset turnover is also very low, at 0.071, meaning that the company is not generating much revenue from its assets. Additionally, the return on assets and return on equity are both 0%, indicating that the company is not generating any profits.
- There are several possible reasons for this. First, the company may not be pricing its products correctly. If the selling price is not high enough, then the company will not be able to make a profit. Second, the company may not be efficiently using its assets. If the inventory is not selling quickly enough, then the company is not generating enough revenue from its inventory. Additionally, the company may not be efficiently using its labor force. If the company is paying its employees more than it is bringing in from sales, then it will not be able to generate a profit.
- To improve its financial situation, Joe’s Bike Shop needs to increase its sales and/or decrease its expenses. The company could increase its sales by offering discounts or promotions, or by increasing its marketing efforts. The company could also try to reduce its expenses by negotiating better terms with its suppliers, or by reducing its labor costs.
- There are several reasons why GAAP accounting is used. First, GAAP is the most common accounting standard in the United States. Second, GAAP is generally considered to be more reliable and consistent than other accounting standards. Third, GAAP is more likely to be accepted by financial institutions and investors.
Advanced Financial Accounting
Part 2
- When a company has revenue in multiple currencies, it must translate that revenue into its functional currency. The translation process can be complex, and different companies use different methods. This can make comparisons between companies difficult. For example, imagine that Company A and Company B both have revenue in euros and U.S. dollars. Company A uses the weighted average method to translate its revenue, while Company B uses the spot rate method.
- The weighted average method takes into account the amount of each currency that was earned, while the spot rate method uses the exchange rate at the time the revenue was earned. If the euro strengthens against the dollar, the revenue that Company A reports will be higher than the revenue that Company B reports. This makes comparisons between the two companies difficult.
- Currency risk refers to the possibility that the value of a currency will fluctuate, and that this will have an impact on the value of a company’s assets and obligations. Currency risk can be managed through hedging, but this can also be complex and costly. For example, imagine that Company C has assets in euros and liabilities in U.S. dollars.
- If the euro strengthens against the dollar, the value of Company C’s assets will increase, but the value of its liabilities will increase as well. This can lead to losses for the company. Currency risk can be managed through hedging. Hedging is the process of buying and selling currency in order to offset the risk of loss. Hedging can be complex and expensive, and it is not always effective.
- The steps you could take to reduce the risk of loss to your business when working with multiple currencies include: Use a foreign currency hedging strategy: It can help protect your business from losses due to currency fluctuations. By hedging, you are essentially taking a position in the currency market in order to offset any potential losses that might occur if the currency you are holding loses value.
- Work with a reputable foreign exchange broker: It is important to work with a reputable and experienced foreign exchange broker when dealing with multiple currencies. A good broker will be able to advise you on the best way to protect your business from currency fluctuations and will also be able to execute trades on your behalf.
- Use a forward contract or currency option to lock in an exchange rate: A forward contract or currency option can help to hedge against currency fluctuations by allowing you to lock in an exchange rate for a future transaction. This can protect your business from losses if the currency you are holding loses value. Diversify your currency exposure by holding a mix of different currencies: One way to protect your business from currency fluctuations is to diversify your exposure by holding a mix of different currencies. This way, if one currency loses value, you will not be as heavily impacted as if you were only holding that one currency.
