Executive Summary
Fashion clothing targets to sell trendy fashion clothing to clients who prefer to buy expensive
garments at a price slightly above the average market price. With an initial capital of $200,000,
the company has its goal on an average daily turnover of the same amount. The business in
fashion clothing industry requires heavy investment in stock as most customers have different
sizes and preferences and they require a large variety made up of different sizes and designs.
The objective of Fashion clothing is sell unique products that are appealing to clients and which
have been designed with utmost accuracy and according to the clients exact details. The apparels
are meant to be custom made per the client’s requests.
MFR.ASS.W3 2
The mission of the company is to allow many potential clients to place orders that that they are
assured of good quality and timely delivery.
Fashion clothing is a company that intends to take advantage of the delays in deliveries of orders
that is common in the apparel industry. The company plans to sell most of its custom made
designer clothes through the internet hence its strategy is to stock a few items for display only
while the materials for the major orders that have been placed by customers can be obtained
directly from the supplier’s shops and delivered to the business premises directly before they are
manufactured according to the sizes and designs requested by the clients.
The main component of the internet based sales is timely delivery of the finished product to the
client. The company must has already strategized to have an efficient delivery system to
maintain its potential clients.
Contents Pages
- Introduction………………………………………………………………………………4
- Main financial findings………………………………………………………………..4
2.1 Summary of the first 6 months business operations…………………………..5
2.2 Financial accounting statements………………………………………………6 - Analysis
3.1 Initial analysis in context of the three financial statements…………………..6
MFR.ASS.W3 3
3.2 Investigations to increase efficiency………………………………………….7
- Conclusion………………………………………………………………………………7
- References………………………………………………………………………………8
- Appendices………………………………………………………………………………9
List of Figures
ANNEX I: Statement of financial position Fashion clothing – 01.07.20X5 and 31.12.20X5…9
ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5
ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20 X5
ANNEX IV: Projected cash flow forecast for the first six months of trading
MFR.ASS.W3 4
- Introduction
Fashion Clothing is a new company in the market. Its initial investment amounts to $200,000 and
75% has already been invested in the business while the balance is in the bank.
The company has forecasted its initial sales for the first six months of trading and it hopes to
breakeven in the third and final quarter of 20X5.
The major products that the company intends to manufacture are fashionable and trendy dresses
for women and gentlemen suits for men. Shirts and ties for men will be introduced after the first
phase of the projection.
Ladies designs seem to be more prevalent in the market than men’s original suits and ties.
Fashion Clothing intends to provide a wide array of Ladies clothing for display together with
matching huts, belts and shoes which will be obtained from the market to enhance the sale of
matching items.
For children, fashion clothing intends to have a retail section that has been franchised from other
larger apparel manufacturers to boost its sales for the first two years of trading. This strategy
would make it possible for the company to decide if it’s profitable enough to introduce their own
manufacturing line for children clothing. - Main financial findings
The projected cash flow statement indicates that the company will incur losses throughout its
trading periods in the next six months
MFR.ASS.W3 5
2.1 Summary of the first 6 months business operations
Jul Aug Sep Oct Nov Dec
Sales £
150,000.0
£
120,000.0
£
150,000.0
£
210,000.0
£
260,000.0
£
285,000.0
Total expenses £
276,667.0
£
276,667.0
£
276,667.0
£
276,667.0
£
279,666.0
£
341,666.0
Loss -£
126,667.0
-£
156,667.0
-£
126,667.0
-£
66,667.0
-£
19,666.0
-£
56,666.0
Balance C/fwd -£
76,667.0
-£
233,334.0
-£
360,001.0
-£
426,668.0
-£
446,334.0
-£
503,000.0
For the first six months the company will register losses as the sales are not enough to honor all
the financial obligations and commitments that the company has entered into, in July for instance
the total sales would amount to £150,000 while the total expenses would amount to £276,667
pounds. In august, the sales would amount to £120,000 while the total expenses would be the
same as in the month of July hence a loss of £126,667 and £156,667 would be incurred for July
and August respectively. The cash at bank that was brought forward would subsidize the loss in
July to £76,667 but the remaining loss would be carried over to August which will result in a
total loss of £233,334. The trend is the same till December where the grand loss would amount to
£503,000. The total sales for the whole period would amount to£1,175,000 while the total
expenses for the same period would be £1,728,000. The difference is a loss of 553,000 while the
balance at the bank reduces the loss to £503,000 (Hermanson, Edwards & Invacevich, 2011,
p.70).
2.2 Financial accounting statements
The income statement registered a loss of £523,000. The assets are like cash at bank and the
assets acquired during the financial year are not entered in this account. However, the
depreciation charged on the asset is entered in this account. A provision for depreciation is
MFR.ASS.W3 6
normally created to ensure that the asset is replaced when it wears out but in this case it has not
been provided for. The tax incurred for the period has also been paid (Garrison, Noreen &
Brewer, 2009, pg. 68)
The balance sheet indicates that the total equity is £323,000 while the current liabilities have
amounted to £664,000 while the current liabilities are £503,000. The debtors could also be
responsible for the problems that Fashion Clothing may be facing but s not mention in any part
of the projections. The cash flow also indicates that the net cash flow from investing and
financing activities amounted to £592,000.
- Analysis
3.1 Initial analysis in context of the three financial statements
The three statements indicate that the projected financial results would mean that the company is
incapable of meeting its financial obligations and it’s insolvent. The sales revenues are not
enough to meet the primary obligations or expenses and it has to rely on bank overdraft or
another source of income to finance its activities. The total amount paid as expenses exceeds the
amounts earned as sales. The extra amount spent must have been received most likely from the
bank or from creditors. But it’s not clear as the projected figures don’t include any creditors or
may be debtors who are yet to pay for the gods received. The liquidity ratios for the company are
also very discouraging. The current ratio for 20X5 for Fashion Clothing is 1.3. The current assets
can only repay the total assets 1.3 times only instead of the ideal standards of for current ratios is
supposed to be 2. That’s for every current liability the current assets should be able to cover it
twice. The quick ratio or the acid test ratio fashion clothing is not even applicable as the current
assets are made up of stocks only. To calculate the quick ratio the inventory is subtracted from
MFR.ASS.W3 7
the current assets and divided by the current liabilities. Hence Fashion Clothing liquidity status is
zero. It’s bankrupt unless its directors look for a way to bail it out. The company needs long term
financing in order for its liquidity to improve (Williams, Haka, Bettner & Carcello, 2008, p.40).
3.2 Investigations to increase efficiency
The sales department must be able to strategize on the best strategy to improve its sales. The
company must increase its efficiency in production and maybe reduce its prices to boost sales.
The liquidity ratios are not favorable and it should focus on obtaining long term debts to finance
its operations.
- Conclusion
To conclude, the directors of the company must work out a way to increase sales and marketing
activities to boost its revenues. In the meantime, the directors should also look for ways of
financing the company’s operations before it stabilizes. The company has a good strategy of
using the internet to get clients on the market and it can be successful as the market is large and
it’s yet to be exploited fully.
MFR.ASS.W3 8
References
Garrison, H., Noreen, E., Brewer, C., (2009) Managerial Accounting , McGraw-Hill Irwin, pg 68
-75.
Hermanson, R.H., Edwards, J.D., & Invacevich, S.D. (2011) Accounting Principles: A Business
Perspective. First Global Text Edition, Volume 2 Managerial Accounting, 37-73.
Williams, J. R., Haka, S.F., Bettner, M.S. & Carcello, J.V. (2008). Financial & Managerial
Accounting, McGraw-Hill Irwin, p. 40.
MFR.ASS.W3 9
Appendices
ANNEXTURES
ANNEX I: Statement of financial position Fashion clothing – 01.07.20X5 and 31.12.20X5
01.07.20X5
Fashion Clothing
Statement of Financial Position as at 01.07.20X5
DR CR
Bank 50,000
Assets 150,000
capital 200000
Fashion Clothing
Statement of Financial Position as at 31.12.20X5
Cost Dep NBV
Non-current
assets
180,000 18,000 162,000
Current assets
Inventory 664000
664000
Total Assets 826,000
Current liabilities
Bank o/d 503000
503,000
Net Assets 323,000
Share holders
equity
200,000
Retained loss 523,000
Total equity 323,000
MFR.ASS.W3 10
ANNEX II: Income statement Fashion Clothing – 6 months to 31.12.20X5
Fashion Clothing
Income Statement for the year ending 31.12.20X5
Sales 1,175,000
Cost of sales mate 390,000
GP 785,000
Less Exp
Labor 480,000
Other expenses 330,000
Depreciation 18,000
Material
purchases
460,000
Total Exp 1,288,000
EBIT -503,000
Tax payment 20,000
Total loss -523,000
MFR.ASS.W3 11
ANNEX III: Statement of cash flows Fashion Clothing – 6 months to 31.12.20 X5
Fashion Clothing
Income Statement for the year ending 31.12.20X5
Cash generated from
operations
-523,000
Add depreciation 18,000
Increase in stock 664000
Cash generated from
operations
159,000
Less tax paid 20,000
139,000
Add bank overdraft 503000
Net cash from operations 642,000
Net Financing and
investments
592,000
Net cash flow 50,000
MFR.ASS.W3 12
ANNEX IV: Projected cash flow forecast for the first six months of trading
Fashion Clothing
Projected cash flow forecast for the first six months of trading
Jul Aug Sep Oct Nov Dec
Balance B/fwd £
50,000.0
-£
76,667.0
-£
233,334.0
-£
360,001.0
-£
426,668.0
-£
446,334.0
Sales £
150,000.0
£
120,000.0
£
150,000.0
£
210,000.0
£
260,000.0
£
285,000.0
Cost of sales mate £
65,000.0
£
65,000.0
£
65,000.0
£
65,000.0
£
65,000.0
£
65,000.0
Labor £
80,000.0
£
80,000.0
£
80,000.0
£
80,000.0
£
80,000.0
£
80,000.0
Other expenses £
55,000.0
£
55,000.0
£
55,000.0
£
55,000.0
£
55,000.0
£
55,000.0
Depreciation £
£
£
£
3,000.0
£
15,000.0
Material
purchases
£
76,667.0
£
76,667.0
£
76,667.0
£
76,667.0
£
76,666.0
£
76,666.0
Non Current asset £
£
£
£
£
£
30,000.0
Tax payment £
£
£
£
£
£
20,000.0
Total expenses £
276,667.0
£
276,667.0
£
276,667.0
£
276,667.0
£
279,666.0
£
341,666.0
Profit -£
126,667.0
-£
156,667.0
-£
126,667.0
-£
66,667.0
-£
19,666.0
-£
56,666.0
Balance C/fwd -£
76,667.0
-£
233,334.0
-£
360,001.0
-£
426,668.0
-£
446,334.0
-£
503,000.0
MFR.ASS.W3 13
References
Flynn, D., 2003, Understanding finance and accounting (rev. 2nd Ed). Durban: Butterworths.
Gitman, L.J., 2000, Principles of managerial finance (9th ed.). Menlo Park, Calif.: Addison
Wesley.
Harrison, W.T. & Hongren, C.T., 2001, Financial accounting (4th Ed). Englewood Cliffs, NJ:
Prentice Hall.
Vance, D., 2003, Financial analysis and decision making: tools and techniques to solve
financial problems and make effective business decisions. New York: McGraw-Hill.
