Question
Retain or sell a business Lucy Chan owns an online financial services company called RightFinance.com. She has some idea about accrual accounting but is not
Retain or sell a business Lucy Chan owns an online financial services company called RightFinance.com. She has some idea about accrual accounting but is not very clear on what to do, so she has come to you for help. Lucy aims to achieve a profit margin on her business of 10%. That is, she expects profit divided by total revenue to be at least 10% or more. Lucy has provided the income statement below, which shows a profit margin of 7% ($29 000/$414 285). If the profit margin falls below 10%, Lucy intends to sell the business. Lucy knows that some accrual accounting adjustments need to be made and that is why she is seeking your help.
To determine the adjustments that need to be made, you have a long discussion with Lucy that reveals the following:
- The fees revenue includes $900 for cash received but the services have not yet been provided to the customer.
- A staff member went on holidays at the end of June and his July wages of $2300 are included in salaries.
- A prepayment of rent of $1400 for June is still shown in the balance sheet as an asset.
- Depreciation expense of $6000 for the year has not yet been charged to the accounts.
Required
- Should Lucy retain the business or sell it, given her requirement that the profit margin must be 10%? Explain the reason for your conclusion, showing calculations.
- Show and explain how these transactions would work through MYOB or XERO
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