Chilman Arora and Nitya Sharin started a clothing line under the name ABHUSAN on 1st of March

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Question:

Chilman Arora and Nitya Sharin started a clothing line under the name ‘ABHUSAN’ on 1st of March 2013. While Ms. Arora agreed to oversee the sourcing, display and marketing aspects, Ms. Sharin would take care of the finances. They pooled in Rs.10 lakhs each as initial capital. They decided to open their first outlet in a commercial space that Chilman owned in an upmarket area of town. ABHUSAN contracted with a fabric supplier in Surat for regular supply of fabric; he agreed to give them 1 month’s credit on purchases.

They purchased a computer for Rs.50,000, a set of second-hand mannequins and clothes stands for Rs.83,000 which they further got refurbished by paying Rs.2,000. They got some more interiors done for Rs.1,25,000 and spent a further Rs.1,60,000 on furniture and furnishings for the showroom. Nitya had a relatively new air-conditioner lying at home that she had purchased for Rs.40,000. She decided to contribute the air-conditioner towards the business. They bought two more new air-conditioners for Rs.35,000 each. They finally opened up their business to the public on the 1st of April, 2013.

Three months had passed and the business seemed to be doing well. Chilman asked Nitya what their financial position was, to which Nitya promptly pulled out a bank statement with a flourish, showing a balance of Rs.13.25 lakhs as of close of 30th June. Not quite convinced by this rosy picture, Chilman asked Nitya to pull out details of all transactions made over the 3-month period. Not too happy at being doubted, Nitya nevertheless produced the following details.

a. Invoices from the Surat supplier over the period Rs.15,33,000

b. Payment for transporting fabric from Surat to Mumbai Rs.12,000

c. Payment to contract tailors and embroiders Rs.1,67,000

d. Telephone, stationary, electricity bills paid Rs.86,000

e. Expenditure on marketing material for the year Rs. 8,00,000

f. Sales were impressive and they had managed to sell dresses whose marked prices totalled Rs.30 lakhs. Being customized pieces, this involved haggling on prices with individual customers who were typically the Page 3 mentions of Mumbai. Finally, they managed to negotiate these sales for Rs.29 lakhs. The marked prices on the dresses sold were as follows:

· Sold for Cash Rs.2 lakhs

· Sold on Credit card payment Rs.6 lakhs*

· Sold on Credit Rs.22 lakhs

g. Collections from customers Rs. 2.75 lakhs

They also had in hand firm orders worth Rs.20 lakhs to be completed and delivered within the next quarter. Two Bollywood stars had paid Rs.2.5 lakhs in advance towards their orders. Word in the business circles was that despite the Page 3 grandeur, when it came to settling bills, customers could be difficult; almost 5% of money owed was never paid up!

Chilman reminded Nitya that she had been using her personal car for all local travels related to the business and had fuel bills amounting to around Rs.30,000 and estimated approximately 60% of the usage was for the firm. Chilman was primarily running the show at the firm with the help of a manager with Nitya pitching in intermittently. The manager was being paid salary at the rate of Rs.30, 000 per month. Fabric and other material amounting to Rs.2 lakhs was estimated to be in stock as on 30th June, 2013. The tailors and embroiders were to be paid another Rs.23, 000 for the delivery of the last lot of clothes. Had Chilman rented out the commercial space she owned; she may have earned monthly rentals of Rs.3 lakhs.

They had both heard of a concept called assets being depreciated but did not have much of an idea of what it was or how it worked. A family accountant suggested that a flat 20% was a safe rate to go with. He also advised them to provide an allowance for doubtful debts. Prevailing income tax rate was 30%.

Required:

a. Draw up necessary statements to ascertain the Performance of ABHUSAN for the period ended 30th June 2013 and Position of business as on the date

b. Clearly state any assumptions you may have made in preparation of the statements.

c. What is your opinion on the performance and health of the firm for the 3 months ended 30th June 2013 based on Net Profit Margin, Working Capital and Economic profit?