0 Closing Balance $ 22,510 $ 180,440 $ 180,440 Explanation of Entries for Wages The wages, i.e., the direct labor cost for the production of chips, amount to 3/4 of the remuneration given by Lesay to Nielson. This means that out of the total remuneration of $ 48,000 given to Nielson, $ 36,000 can be attributed to wages since 3/4 of his time working at creating chips is devoted to manufacturing chips at the company; the remaining amount, i.e., $ 12,000, is attributed to the compensation given to Lasey for overseeing administrative issues. Therefore, the amount of wages expenses for the financial year 2003 amounts to $ 36,000. Apart from this, as can be observed in the balance sheet of the company for the year 2002, there are wages which are yet to be paid by the company, which amount to $ 7,350. In addition to this information, it is also worth noting that the total expenditure incurred by the company in relation to payroll amounted to $ 89,850. Among the expenditure incurred in relation to payroll, $ 42,000 ($ 3,500 x 12) refers to salary of Lesay, therefore it is found that the amount which is related to the payment of wages is $ 89,850 - $ 42,000 - $ 12,000, i.e. $ 35,850. However, keeping in mind that there is an amount of wages payable therefore after accounting for the total payment made towards the salaries and wages expenses, there is still an amount of $ 7,500 left to be paid, and it is, therefore, recorded as wages payable in the balance sheet (Drury, 2007; Nikolai, Bazley, & Jones, 2009). Financial Statements The financial statements of Creative Chips for the financial year ending 31 December 2003 are presented as under, which contain Income Statement, Balance Sheet and Cash Flow Statement. Income Statement Creative Chips Income Statement for the year ended...
Apart from this, the gross profit amount as depicted in the income statement of the company is significant and can be regarded as highly favorable for the company. However, the operating expenses of the company are significantly high, which, as a result, have undermined the significance of the gross profit. The liquidity position of the company indicates that there are too much liquid assets held up by the company, which could have been invested for generating income from other sources (Webster, 2003; Nikolai, Bazley, & Jones, 2009).
The company’s operational efficiency can be questioned on the basis of the fact that there is only one employee who runs the manufacturing operations of the company. On the other hand, there is no marketing department of personnel of the company which would prove to be helpful in sales promotion of the company (Nikolai, Bazley, & Jones, 2009). Moreover, there is only one shareholder of the company, i.e., the owner herself. This unity of ownership means that all risks are for the owner to bear. Recommendations to the Owner of Creative Chips
On the basis of analysis presented in the above paragraphs, following are the recommendations given to the owner of Creative Chips:
Considering the cash flow statement of the company, one can see that there are no inflows of cash for the company from investing or financing activities. Thus, the only cash generating source for the company is its manufacturing and selling operations. On the basis of these observations, it is recommended that the company shall invest its retained earnings or lend its finance to others so as to make sure that there are other sources of income also for the business.