Computerized Accounting

Re: Unit 5- Individual Project

Courtney Jackson

Discussion Board 4

Computerized Accounting

August 09, 2017

We have come to the close of the fiscal year and that means it is time to preform closing journal entries.  What this means is that we will be zeroing out all temporary accounts and transferring their balances to permanent accounts.  The reason for this is because this information is only recorded for during the accounting period and not during the life of the company.  The accounts that will be closed out are the accounts that appear on the income statement.  The accounts that appear on the income statement are all temporary accounts solely used to track expenses for an accounting period.  When using QuickBooks, the software makes it very simple to close out the year.  It is as simple as changing a few settings when it comes to the end of year closing.  All that is needed is the date of the beginning of the fiscal year and if you wish for QuickBooks to close out accounts for you.  Once settings are saved there is nothing else to worry about when the year is over.  If you ask me that is kind of a peace of mind not having to close the books manually.  Now that the temporary accounts are closed, that will leave what are called the permanent accounts.  Permanent accounts are accounts that appear on the balance sheet.  These accounts remain open as they report for the life of the company.  These accounts do not have to be closed out due to them not having an accounting period close. All temporary account balances will be transferred to the permanent accounts to then be documented with the entire life of the company.  

When discussing the life of the company and its financial state you will have several reports that will provide you with the information you need to make important decisions for the company in the future.  There are three different reports and they all provide different information.  The first report is the balance sheet.  This report is the one you would look at to see detailed information on the company’s assets, liabilities, and the shareholders equity.  Using the balance sheet, it follows a formula which is Assets = Liabilities + Shareholders Equity.  Using this equation which is two-sided means that both sides need to match or balance out.  If it is balanced, that means there are no signs of any errors in the journal entries.  Moving on to the second report, that would be called the income statement.  The income has different data, that shows the revenues and expenses for a certain time frame.  This time frame is usually month to month but can be pulled in several months if needed.  The income statement has all the temporary accounts like mentioned before that close at the end of the accounting cycle.  Companies use the income statement to show how revenues are turned into net income.  With this given information managers and investors can see whether the company made or lost money in the time that is reported.  From here we move on to the third financial statement known as the cash flow statement.  This financial statement shows the changes in the balance sheet and the income statement and how it affects the cash and cash equivalents which then creates an analysis breakdown of financing, investing and operating activities.  What sets the cash flow statement apart from the other two statements is that it doesn’t include the amount of future incoming and outgoing cash that has been recorded on credit.  Now that I have provided information on the three different financial statements, I believe that you should have a better understanding of which statement you would need for certain information.  

Now let’s get into some financial ratios I feel will be needed for your businesses success.  I would like to go over five different ratios and explain what the answer means for your company.  The five ratios I will be discussing are debt to equity, debt to asset, current, return on equity and your net profit margin.  Let’s begin with debt to equity, for this ratio you will take total liabilities and divide it by the shareholder’s equity.  (Example: 114,024 / 220,253 = 52%) Having a debt to equity ratio 0.4 or lower is ideal but having one to low could mean the company isn’t taking advantage of the increased profits that financial leverage may bring.  Having a high debt to equity ratio could mean higher degrees of debt financing.  On to the debt to asset ratio, you will take the current liabilities and divide it by the current assets.  (Example: 14,024 / 96,777 = 1.4) For your debt to asset ratio you would like to keep it at 0.5 or lower.  Having a number greater that 0.5 means that most of your company’s assets are financed through debt.  The third ratio I would like to discuss will be the current ratio.  This ratio is like the debt to asset ratio except you flip the equation.  The equation is current assets divided by current liabilities.  (Example: 96,777 / 14,024 = 6.90) Having a current ratio of 6.90 is not horrible but doesn’t necessarily mean the company is in a state of financial wellbeing.  Companies need to keep the current ratio above one, if it is under one that means your liabilities are greater than the assets then questioning whether the company can payoff is obligations if they came due.  Having a high current ratio over three could mean that the company is not using their current assets effectively, not securing financing well or managing its working capital correctly.  The next ratio is return on equity, with this equation you will take the net income and divide it by the shareholders equity. (Example: 20,253 / 200,000 = 1%) To be considered a good return on equity it should be between 15% to 20%, these percentages represent active levels of investment quality in a company.  With your company being at a 1% currently it wouldn’t be considered to have active levels of investment going on.  Being a new business, this can cause for a low return on equity, I for see in the next 5 years or so that the return on equity to increase.   The final ratio would be the net profit margin, for this ratio you will take the net profit and divide it by the net sales. (Example: 20,253 / 45,877 = 44%) For a good net profit margin depending on the type of industry, a 25% or higher is considered favorable.  Your company has a great profit margin at 44%, but even if it was lower that doesn’t necessarily equate to low profits.  Every industry is different, using Walmart as an example they have delivered high returns to its shareholders with having a profit margin at less than 5% annually.  What this means for your company is after paying all expenses you still have a good profit coming in from sales and rentals.  After discussing these five ratios I hope you have a better knowledge of what each ratio means for your company.  There are many more ratios your company might find beneficial, I just thought these five would be the best ones to discuss with you.  I would like to now move on to the disclosures, maturity dates of major liabilities and the depreciation policy for the company.