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Learning Outcomes

This assignment assesses the following learning outcomes:

LO2 Apply accounting principles and concepts in the interpretation of financial statements

LO3 Interpret information in financial statements, with a focus on assessing financial performance, financial position, liquidity, and key risk indicators of businesses to make informed decisions and recommendations for effective financial management

Assignment Instructions

There are THREE business scenarios that require your evaluation. Each scenario requires you to write a report. Please read them carefully.

ASSESSMENT TASK

You are the financial consultant for a small business, “TechSpark Solutions,” which is expanding its operations. The company is considering purchasing new equipment and entering into several new service contracts. As part of your role, you need to explain the financial implications of these decisions to the management team, who have limited knowledge of accounting principles.

Scenario 1: TechSpark Solutions is considering the following transactions to support their business operations:

a) Purchase of a new server for $10,000 to enhance data processing capabilities.

b) Office furniture worth $2,000 for the newly expanded office space.

c) A 2-year loan of $15,000 was taken from a bank to finance the purchase of the server.

Task: Write a short report of not more than 500 words to explain the implications of the above transactions. In the report, you must include the following items:

1. Define what an asset and a liability are in accounting terms.

2. Classify each item listed above as either an asset or a liability and explain why each item falls into its respective category.

3. For each item classified as an asset, indicate whether it should be recorded as a current or non-current asset, and for each item classified as a liability, indicate whether it should be a current or non-current liability. Justify your classification.

Scenario 2: TechSpark Solutions has entered into a contract to provide IT support services to a client. The contract spans from November 2024 to April 2025. The total contract value is $24,000, with payments to be received as follows:

$12,000 on signing the contract in November 2024.
$12,000 at the end of the contract in April 2025.

Task: Write a short report of not more than 500 words to address the above matter. In your report, you must explain the following points:

1. Explain the accrual accounting principle and how it differs from the cash basis of accounting.

2. Describe how TechSpark Solutions should recognize the revenue from the contract in their financial statements for the fiscal years ending December 31, 2024, and December 31, 2025, according to the accrual accounting principle. Indicate the amount of revenue that should be recognized in each year.

3. Consider a scenario where the client requests to defer the final $12,000 payment until June 2025, after the contract has ended.

Explain how this deferral would affect the recognition of revenue under the accrual accounting principle and discuss any potential challenges this might create in accurately reflecting TechSpark Solutions’ financial performance for the fiscal years ending December 31, 2024, and December 31, 2025.

Scenario 3: TechSpark Solutions is also seeking to diversify its investment portfolio by considering investing in Dillard’s Inc., a leading retail chain (https://www.dillards.com/ ). To make an informed investment decision, TechSpark Solutions requested that you assist in evaluating Dillard’s financial performance over the past 3 years, 2020 to 2023.

The data for the analysis is presented in the file “Dillard’s 2020-2023 Selected items in Financial Statement and Industry Averages”.

Task: Write a report of not more than 1500 words to evaluate Dillard’s financial ratios. In your report, you must address the following requirements.

1. Calculate the following ratios for 2020 to 2022:
o Profitability Ratios: Gross Profit Margin and Net Profit Margin
o Liquidity Ratios: Current Ratio and Quick Ratio
o Efficiency Ratios: Inventory Turnover period and Average settlement period (Accounts Receivable)
o Solvency Ratios: Interest coverage ratio and debt-to-equity ratio

2. Analyse and interpret the ratios:
o Profitability: Analyze the trends in Gross Profit Margin and Net Profit Margin
over the 3-year period. Discuss how profitability has changed and what factors
might have influenced these changes.
o Liquidity: Evaluate the trends in the Current Ratio and Quick Ratio. Assess
Dillard’s ability to meet short-term obligations and discuss how liquidity has
changed and what factors might have influenced these changes.
o Efficiency: Review the trends in Inventory Turnover period and Average
settlement period (Accounts Receivable). Analyze how efficiently Dillard’s is using its resources and managing its assets.
o Solvency: Evaluate the trends in the interest coverage ratio and debt-to-equity ratio. Assess Dillard’s ability to meet its long-term obligations and the level of financial risk.

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