Financial Accounting Assignment

Name: Disha Nangia

Batch: 2016-2018
Assignment: Financial Accounting

Roll no.: 39
Course: PGDM Core - B
Date: 25th August, 2016

Amity Universe sells artifacts either for cash or notes receivable that earn interest. The
business uses the direct write-off method to account for bad debts. Sujan Singh, the
owner, has prepared Amitys financial statements. The most recent comparative income
statements for 2003 and 2004 are as follows:
2004
Total Revenue
Total Expenses
Net Income

2003
210,000
195,000
157,000
153,000
53,000
42,000

Based on the increase in net income, Amity seeks to expand its operations. Sujan has
asked you to invest Rs.50, 000 in the business. You have several meetings at which you
learn that notes receivable from customers were Rs.200, 000 at the end of 2002 and
Rs.400, 000 at the end of 2003. Also, total revenues for 2004 and 2003 include interest at
15 percent on the years beginning notes receivable balance. Total expenses include a
doubtful accounts expense of Rs.2, 000 each year, based on the direct write-off basis.
Amity estimates that doubtful accounts expense would be 2 percent of sales revenue if
the allowance method were used.
A. Prepare for Amity Universe a comparative single-step income statement that identifies
sales revenue, interest revenue, doubtful accounts expense, and other expenses, all
computed in accordance with generally accepted accounting principles.
B. Is Amity Universes future as promising as his income statement makes it appear? Why
or why not?
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A. Income Statement:

Sales Revenue
Interest Revenue
Total Revenue
Bad Debt Expenses
Other Expenses
Total Expenses
Net Income

2004
150,00
0
60,000
210,00
0
3000
155,00
0
158,00
0
52,000

Interest Revenue:
2003: 200,000*15% = 30,000
2004: 400,000*15% = 60,000
Bad Debt Expenses
2003: 165,000*2% = 3,300

2003
165,00
0
30,000
195,00
0
3300
151,00
0
154,30
0
40,700

2004: 150,000*2% = 3,000

Other Expenses
2003: 153,000 - 2,000 = 151,000
2004: 157,000 - 2,000 = 155,000

B. It is mentioned that Amity Universe sells artifacts either for cash or notes
receivable that earn interest. It is observed that the Sales Revenue is decreasing
from 2003 to 2004 and the notes receivable has increased from 2 lakhs to 4 lakhs
in a year. This implies that the owner has sold the artifact on credit and not
collected the money yet.
Amity Universes future is not as promising as his income statement makes it
appear due to the following reasons:
a. At the end of 2003, the total revenue as per calculation is 395,000 (195,000
+ 200,000). However, at the meetings, it was learnt that the notes
receivables from customers at the end of 2003 was Rs. 400,000. This
difference of Rs. 5000 is probably because a cheque was issued but it
bounced.
Even though the owner has been selling the artifacts on credit, his revenue
is not increasing. This implies that there is less demand for his product and
the product itself is not good.
The above statements prove the company is not worthy enough to collect
the credit. Also, there is an uncertainty involved in this case and it may
happen again in the future.
b. Interest revenue accounts for approx. 29% of the total revenue. However,
Sujan Singh is in the business of selling artifacts, and not giving loans.
Without this revenue, Amity Universes is a loss making company.
c. The notes receivable at the end of the 2002 was Rs. 200,000, implying he
has not collected it for the previous year too. Hence, the prospect of getting
the money back looks bleak. Moreover, when the sales revenue is
decreasing, the cost to help make that revenue is increasing (other expenses
increased from 2003 to 2004)