Introduction
- The economic entity– Felix business on new venture is considered to be distinct from the owners who is Felix and any other firms like jewelry shops in the Zurich owned by Paula when preparing the financial statements under the economic entity assumption.
- Accrual basis– The accrual basis, sometimes known as “cash accounting,” is a system of financial reporting that tracks all cash associated with the Felix business firm as it is received and disbursed (Titman et al., 2018).
- Going concern– The financial statements of Felix business are prepared on a going-concern basis, which makes the assumption that the Felix business firm would carry on with its regular operations for the foreseeable future.
- The period assumption– The elapsed period between financial statement reports is indicated by this assumption. It shows the period to which Felix business firm will be in operation.
- Revenue Recognition Principle– As a result, Felix business firm is required to record revenue in the period in which it is earned. However, income is not recorded until a good or service is rendered (Sikidar & Gautam, 2019). This indicates that the time frame during which the service or product was provided by Felix business to its client is the time frame during which revenue is recognized.
- Expense Recognition (Matching) Principle– This indicates that Felix must match all his expenses to related income in the time period in which the revenues were received. An understated net income in one quarter and an inflated net income in another period could result from an imbalance between expenses and revenues. Statements would not be reliable if costs were recorded separately from earnings (Sakun et al., 2020).
- Cost Principle– States mandates that almost all assets owned by Felix firm must be documented at their value as of the acquisition date, like the value of racking and special safe, smart drill and silver chains (Landis & Skouras, 2021). As the price agreed upon when purchasing the asset from the vendor, this value is typically simple to ascertain.
- Full Disclosure Principle– states that any actions of Felix business firm that can have an impact on the financial accounts must be recorded. These actions could be of a non-financial character or extra information that isn’t readily visible on the primary financial statement (Financial Accounting Standards Board, 2021).
- Separate Entity Concept– According to this separate entity concept, a Felix firm may only include actions that are directly related to its business operations and not those that have an impact on himself in its financial statements.
- Conservatism– It states that a new venture of Felix should err on the side of caution and disclose the most cautious amount if there is ambiguity in a future financial forecast. This would imply that any unforeseen or anticipated costs or losses should be recorded, but unforeseen or anticipated profits shouldn’t (Certified Financial Analysts, 2020). This does not overstate income and provides stakeholders with a more trustworthy picture of the company’s financial status.
- Monetary Measurement Concept– A system of monetary measurement, or a monetary unit by which to value the transaction, is required in order to register a transaction (Cheryl et al., 2019). It would be impossible to enter information into the financial records without a monetary value. All the transactions that Felix business is involved should be in monetary form in order for it to be recorded in the financial statements.
Assumptions and Estimates
- The supplier of Tahitian Pearls will offer the exclusive rights to Felix sell their products in Switzerland for a six-year period in exchange for an upfront payment for those rights.
- All Single, undrilled, pearls sales are done at discounted rate to Felix at 35% in XPF
- All goods are shipped to Felix on receipt of payment for each order; the time for placing each order is three weeks and courier costs is paid upon every ordering time.
- There would be maintenance of a minimum stock of four weeks’ worth of sales.
- Racking and special safe are purchased and paid monthly in advance plus a security deposit of three month’s rent which are refundable in full if there is no damage to the premises.
- There would be demand of about 250 pearls per month in the first year, sales would start at only 30 in the first month before building up slowly after which they would remain constant.
- There would be an average selling price in Switzerland of CHF 270 per pearl which ignores any impact of VAT/sales taxes in your calculations.
- The Packaging and shipping within Switzerland would average CHF 15 per pearl, and Felix does not currently intend to charge that to his customers.
- All the internet sales are done by credit card, where the credit company takes 1.2% per every sale and remits the total monthly to Felix, fifteen days after the end of each calendar month.
- There is a marginal corporation tax rate on all incomes from the company at 40% which is payable one year in arrears.
A Profit and Loss Statement for The First Year of Operations
Balance Sheet At the End of The First Year
How Much Cash the Venture Will Need to Get Started
Felix needs CHF 900,000 as a starting capital for the whole venture. The amount required includes the available funds from his retirement package.
Conclusion
In conclusion, preparing the profit and loss statement for the first years of operations assist Felix to understand the need of accounting for all the required capital, evaluate the growth patterns of the venture and also make informed decisions about the specific costs likely to be incurred on the business. In addition, when preparing the balance sheet of the proposed venture, it enables Felix to understand and asses the capital requirements and how the business is likely to generate the future revenue to the proprietor. The items included in both the profit and loss accounts and the balance sheet assist Felix to have deep understanding of the basic requirements to start and operate business venture which would expand in the future. Therefore, these financial statements are crucial in informing the business owner of the vital items which will be needed for the whole operations of the business and its proposed growth strategies.
References
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Cheryl Jones, Christine T. Kovner, & Steven A. Finkler. (2019). Financial management for nurse managers and executives (5th edn). Elsevier Education Publsihers.
Financial Accounting Standards Board. (2021). Accounting standards update: Franchisors-Revenue from contracts with custoemrs. Financial Accounting Series , pp. 1-36.
Jana, G. (2019). Cost and management accounting-1 (Rev. ed. ). New Central Book Agency.
Landis, C., & Skouras, S. (2021). Guidelines for asset pricing research using international equity data from thomson reuters datastream. Journal of Banking and Finance, 130, 8.
Sakun, A., Hilorme, T., Perevozova, I., & Reznik, O. (2020). Accounting model of human capital assessment within the information space of the enterprise. Academy of Accounting and Financial Studies Journal, 24(3).
Sikidar, S., & Gautam, H. (2019). Financial statement analysis. New Central Book Agency.
Titman, S., Keown, A., & Martin, J. (2018). Financial management: Principles and applications (13th edn.). Pearson.
Wilkins, G. (2022). 6 Basic financial ratios and what they reveal. Corporate Finance. Web.