On 1 July 2018, Emma established a small sole trader business which she named All Occasions Clothing. The retail fashion outlet operates from business premises in Melbourne, Australia, and is Emmas only source of income. She receives and sorts deliveries of clothes at the back of the premises, and sells clothes from the retail shop at the front. Having operated for just two years, Emma could not have predicted that her second year of trading would be so unpredictable compared to the first. She, like many other small business owners, faced some real challenges as the Covid-19 pandemic spread throughout Melbourne. During 2020, in response to the pandemic, Emma established an online business and purchased new computer equipment that would manage the accounting and inventory system more efficiently. After the new equipment was fully functional, old equipment was sold.

Emma is in the process of analysing the end of period financial statements, which are presented below:

a. Identify three favourable items in the financial statements despite the difficult and unusual year Emma has experienced due to the pandemic. (3 marks)

b. Emma reported her Gross Profit Margin for the six month period 1^st July 2019 to 31 December 2019 as 70%. Her Gross Profit Margin for the six months 1^st January 2020 to 30 June 2020 was 54%. Briefly explain two reasons that may have caused this change. (4 marks)

c. Emma is proud to have not extended the loan to buy equipment, but realises that cash is essential for business survival. Provide one advantage and one disadvantage of paying cash for the new computer equipment. (2 marks)

d. Emma is worried about what a comparison of her actual results to budget may reveal due to the unpredictable nature of the pandemic. What advice would you give Emma, or any other small business owners, about their financial performance and position during the pandemic? (3 marks)

e. Emma has heard about the Balanced Scorecard as a performance assessment tool, but she does not have extensive knowledge of it. Provide Emma with a relevant example of something she may use to assess her business performance in each category. (4 marks)

f. The Debt Ratio of Emmas business was 76% in 2019, and 86% in 2020. Emma is confused by this, because she knows she reduced her loan by $10,000 which she thought would have a favourable outcome. Explain the situation to Emma. (2 marks)

All Occasions Clothing Income Statement for the year ended 30 June 2020 Sales 280,500 LESS Cost of sales (106,700) GROSS PROFIT 173,800 LESS Operating expenses Wages expense 90,600 Depreciation of premises 20,000 Depreciation of equipment 16,000 Advertising 14,000 Interest expense 5,000 Insurance expense 5,000 Bad debts expense 4,500 Utilities 19,100 Loss on sale of equipment 1,000 (175,200) NET LOSS 1,400 All Occasions Clothing Statement of Changes in Equity for the year ended 30 June 2020 Capital at 1 July 2019 Less Drawings Less Loss Capital at 30 June 2020 67,200 (32,000) (1,400) 33,800 All Occasions Clothing Balance Sheet as at: Current Assets 30/6/20 30/6/19 Cash 44,000 Prepaid Insurance 5,500 10,500 Prepaid Advertising 8,000 12,000 Accounts Receivable 17,000 19,000 Inventory 13,800 11,500 44,300 97,000 Non-current Assets Premises 170,000 170,000 Less Accumulated Depreciation (40,000) (20,000) Computer Equipment 80,000 30,000 Less Accumulated Depreciation (10,000) (0) 200,000 180,000 Total Assets $ 244,300 $ 277,000 Current Liabilities Bank Overdraft 15,900 Accrued Wages 1,100 2,500 Accounts Payable 3,500 7,300 20,500 9,800 Non-current Liabilities Loan Payable 190,000 200,000 Total Liabilities 210,500 209,800 Equity Capital 33,800 67,200 Total Liabilities and Equities $ 244,300 $ 277,000 All Occasions Clothing Statement of Cash Flows for the year ended 30 June 2020 278,000 (112,800) (19,100) (10,000) (5,000) (92,000) 39,100 Cash flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for utilities Cash paid for advertising Cash paid for interest Cash paid for wages Net cash flow from Operating Activities Cash flows from Investing Activities Cash paid for equipment Cash received from sale of equipment Net cash flow from Investing Activities Cash flows from Financing Activities Cash paid for drawings Cash paid off loan Net cash flow from Financing Activities Net Cash Flow Cash balance at 1 July 2019 Cash balance at 30 June 2020 (72,000) 15,000 (57,000) (32,000) (10,000) (42,000) (59,900) 44,000 ($ 15,900) All Occasions Clothing Income Statement for the year ended 30 June 2020 Sales 280,500 LESS Cost of sales (106,700) GROSS PROFIT 173,800 LESS Operating expenses Wages expense 90,600 Depreciation of premises 20,000 Depreciation of equipment 16,000 Advertising 14,000 Interest expense 5,000 Insurance expense 5,000 Bad debts expense 4,500 Utilities 19,100 Loss on sale of equipment 1,000 (175,200) NET LOSS 1,400 All Occasions Clothing Statement of Changes in Equity for the year ended 30 June 2020 Capital at 1 July 2019 Less Drawings Less Loss Capital at 30 June 2020 67,200 (32,000) (1,400) 33,800 All Occasions Clothing Balance Sheet as at: Current Assets 30/6/20 30/6/19 Cash 44,000 Prepaid Insurance 5,500 10,500 Prepaid Advertising 8,000 12,000 Accounts Receivable 17,000 19,000 Inventory 13,800 11,500 44,300 97,000 Non-current Assets Premises 170,000 170,000 Less Accumulated Depreciation (40,000) (20,000) Computer Equipment 80,000 30,000 Less Accumulated Depreciation (10,000) (0) 200,000 180,000 Total Assets $ 244,300 $ 277,000 Current Liabilities Bank Overdraft 15,900 Accrued Wages 1,100 2,500 Accounts Payable 3,500 7,300 20,500 9,800 Non-current Liabilities Loan Payable 190,000 200,000 Total Liabilities 210,500 209,800 Equity Capital 33,800 67,200 Total Liabilities and Equities $ 244,300 $ 277,000 All Occasions Clothing Statement of Cash Flows for the year ended 30 June 2020 278,000 (112,800) (19,100) (10,000) (5,000) (92,000) 39,100 Cash flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for utilities Cash paid for advertising Cash paid for interest Cash paid for wages Net cash flow from Operating Activities Cash flows from Investing Activities Cash paid for equipment Cash received from sale of equipment Net cash flow from Investing Activities Cash flows from Financing Activities Cash paid for drawings Cash paid off loan Net cash flow from Financing Activities Net Cash Flow Cash balance at 1 July 2019 Cash balance at 30 June 2020 (72,000) 15,000 (57,000) (32,000) (10,000) (42,000) (59,900) 44,000 ($ 15,900)