Question One, Sydney Limited:

Sydney Cycles Ltd is a small company that was originally started in late 2000 following the Sydney Olympics by a group of cycling enthusiasts who were unable to obtain the parts needed to repair or modify their bikes. From its early days Sydney Cycles Ltd's business model has been very locally-focused with its services and product offerings tailored to meet the needs of cyclists from around the inner-city metropolitan areas of Sydney. While the firm imports a small range of specialist racing componentry from suppliers throughout Europe and the United States it primarily manufactures its own frames and, using some imported parts, assembles race and touring bikes within a small factory-unit/retail outlet it leases on a ‘month-to-month' basis. The firm's management has traditionally competed with larger European and American-based brands, such as ‘Cannondale' or ‘Colnago', based upon its ability to offer individual customer service (set-ups and bespoke frames) and expert advice based on their knowledge of the local riding conditions.

The management of Sydney Cycles Ltd has increasingly witnessed changes in their market with many of their former clients now purchasing cycling products via the internet rather than directly from the firm's factory-unit/retail outlet. Sydney Cycles Ltd's management are willing to embrace this changing marketplace but some members of the executive team are concerned about the firm's recent financial performance. Others within the company's management group have a conflicting view, believing Sydney Cycles Ltd is performing comparatively well.

In a management meeting during December, two directors (both major shareholders) of the firm expressed their concerns about the performance of Sydney Cycles Ltd. These two directors have made loans to the company of $1,400,000 in the recent past and were also therefore its major creditors. The loan was provided to Sydney Ltd free of any interest charge and now the two directors wish that the firm would begin to repay them their loan capital in the coming months.

Both shareholder/directors have recently suggested that they also required more timely financial data from the company. One of these directors also suggested that the firm needed to benchmark its performance against similar organisations. Others within the firm's management group have cautioned against this and suggested that this may be problematic given that the firm was not large and therefore truly comparable data may be difficult to obtain. As a result of their demands, from the beginning of the 2016 calendar year, the firm will now produce monthly financial statements.

The management of Sydney Cycles Ltd have scheduled a finance committee meeting in early February 2016 to discuss the business's performance. Sydney Cycles Ltd's external accountant had prepared the following balance sheet as at the end of December, 2015 and a list of summarised transactions that had occurred during January 2016. The firm's general manager has obtained the following ratios from a commercial supplier of financial data. These ratios were based on the full-year ended 31st December, 2015.

• ROE: 25 per cent
• ROA: 17 per cent
• Leverage: 1.50 times
• Profit margin: 4 per cent
• Gross margin: 40 per cent
• Asset turnover: 5 times
• Inventory turnover: 17 times
• Debtor turnover: 33 times
• Current ratio: 0.50 times

During January 2016, the following events occurred:

a. Sydney Cycles Ltd paid $1,700,000 cash to its creditors;

b. The firm also paid all salaries and wages outstanding at the end of December;

c. Sydney Cycles Ltd purchased $800,000 worth of cycle parts to hold in inventory on credit from its US and European suppliers;

d. The firm made internet sales on credit of $2,265,680 during January;

e. The firm made direct ‘store-based' sales and service fees from its unit/outlet in cash totalling $450,000;

f. Management conducted a ‘stock-take' at the end of January and determined that Cost of Goods Sold [CoGS] for the month was $1,570,000;

g. The firm's existing insurance coverage expires at the end of January. As a result Sydney Cycles Ltd paid cash for its annual composite insurance premium of $840,000 (12 month policy commencing 1st of February, 2016, covers building / equipment fire and theft, motor vehicles; person liability, workers compensation etc);

h. The firm received in cash the sum of $2,800,000 from its debtors;

i. Paid $150,000 as an initial repayment of the monies owing on the ‘Director's loan';

j. During a television interview recorded at the ‘Santos Tour Down Under' (an annual cycling event held in Adelaide during January) both Cadel Evans (Tour De France winner) and Olympian, Anna Meares, offered positive endorsements for Sydney Cycles Ltd's products. The international media exposure provided by the interviews immediately lead to an increase in activity on the firm's website. The firm's management are delighted and believe that, although the pair's endorsements was unsolicited, it was the equivalent of the firm spending $800,000 on a publicity and marketing;

k. Unfortunately the management of Sydney Cycles Ltd had already embarked upon an advertising campaign using a variety of media in late 2015 (and thus were unable to capitalise on the recent favourable press). All advertisements went to air in December 2015. The contract called for Sydney Cycles Ltd to pay the firm's advertising liability in two equal instalments. During January the firm paid the first of these two instalments on its advertising liability;

l. Paid lease on factory unit for February of $240,000. (The lease is payable monthly in advance, at $240,000 per month);

m. The firm paid utility-related expenses (lighting, power, Government charges, incurred during January, of $210,000;

n. The management of Sydney Cycles Ltd has received notification that Newcastle Cycling Ltd has gone bankrupt - this is a debtor with an outstanding balance of $130,000;

o. After writing-off Newcastle Cycling Ltd's debt, management requires the Allowance for Doubtful Debts to have a balance of $180,000;
p. The management of Sydney Cycles Ltd depreciates equipment at a rate of 20 per cent per annum based on its historic cost (straight-line);

q. The management of Sydney Cycles Ltd depreciates motor vehicles at a rate of 15 per cent per annum based on its historic cost (straight-line);

r. The management of Sydney Cycles Ltd has noted that the current book value of their plant and equipment is slightly below its current market price. As a consequence the firm's management is unsure as the whether they should revalue the plant and equipment upward by an additional $10,000;

s. The firm incurred (but did not pay) salaries and wages expense of $310,000 for January;

t. The firm has hired a new part-time staff member with specific expertise in the promotion of internet sales. She is expected to increase internet sales by $50,000 per month. She will commence employment with Sydney Cycles Ltd on the 1st of March 2016 and will receive $10,000 per month;

u. Sales commissions for each month are determined on the last day of that month. For January commissions were $22,000. They will be paid next month;

v. As a result of the publicity generated during the ‘Santos Tour Down Under' by late January Sydney Cycles Ltd received an order from Bathurst Bikes Ltd to sell $210,000 worth of custom designed frames to be delivered in late March, 2016;

Required: Making and discussing any assumptions necessary

1. For the month ending 31st of January, 2016 [ignoring taxation]:

- Prepare journal entries (including adjusting entries);
- Post to ledger accounts;
- Prepare a ‘post-adjustments' trial balance;
- Prepare closing entries;
- Prepare a ‘post-closing' trial balance;
- Prepare an Income Statement for the month of January, 2016;
- Prepare a Balance Sheet as at the 31st of January, 2016;