Appendix 1: Case study – Houzit Pty Ltd

You have recently been appointed as the business manager of Houzit Pty Ltd having been a
store manager for the past three years. Houzit Pty Ltd is a 15-store retail chain located in
Brisbane. Houzit is the leading homewares retailer, catering to the growing need for
furnishing new and renovated dwellings in the greater Brisbane area.
The assortment on offer of bathroom fittings, bedroom fittings, mirrors and decorative items
together with the recently added lighting fixtures has positioned Houzit as a leader in
homewares retailing in Australia. Houzit has grown over the past five years from a single
store to the current chain. Houzit prides itself on superior after sales service which has been a
key reason for the continued growth in sales and corresponding profit increases. Today Houzit
employs over 150 staff.
Houzit Pty Ltd is a proprietary limited company (ACN 34 765 234 02) registered with the
Australian Securities and Investment Commission. The registered address is with Houzit’s
solicitors (Langs Lawyers, 535 Queen Street, Brisbane, QLD 4000) and the principle place of
business is 505 Boundary Street Spring Hill Brisbane QLD 4000.

Computer software requirement

The current accounting information system has not adequately provided sufficient analysis of
revenue and expenditure and has made it difficult to make informed estimates of future
profits. Estimates have relied on the ‘gut feel’ of the experienced traders on the board and of
the senior managers. The board sees the need to apply more analysis to past results that they
believe could be done with the introduction of state-of-the-art computer software.
Houzit Pty Ltd wants to upgrade their existing accounting system which will manage the
company accounts more efficiently in the long run. They request that the new system you
recommend to them to be compliant with all legislative and statutory requirements for small
to medium businesses.
None of Houzit’s products are GST free however the accounting information system records
the GST collected as well as the input tax credits earned on the purchases of stock and assets.
These amounts are reported and paid in accordance with the business activity statement (BAS)
schedule determined by the Australian Tax Office.
They have 100 fulltime and 50 part-time staff, but only 10 of the staff will have or need access
to the financial system. Some staff are paid on a salary sacrifice arrangement that attracts
fringe benefits tax. The staff with access to the financial system want software that is a single
purchase with no ongoing license fees, and a plan to keep using if for the next 3–5 years,
while the organisation continues to grow. They are anticipating that within five years they will
have over 250 full-time staff, and at least 20 staff will require access to the financial system
by then.
The payroll system deducts withholding tax from the employees and remits this along with the
firm’s pay as you go (PAYG) instalment each quarter as reported on the firm’s business
activity statement. Income tax return for the company and its annual statement is completed
by the firm’s accountant. Taxes and fees due are paid by the due dates. Financial records are
kept at Houzit’s principle place of business.
Houzit have just upgraded their computers and have five new desktop PCs which will be used
by the finance staff. They are current (for 2011) specification machines with i5 CPUs and 4Gb
RAM each, and all have Windows 7 Professional and Norton’s 360 installed with the
professional version of Microsoft Office Small Business as well. Other staff will use their
machines at various times, so it is important that the software requires a login to access data
and that data stored by the software cannot be accessed in any other way.

Corporate details

Board
members

CEO

Stores Business
Accountant
manager manager

Accounts
receivable

Accounts
payable

Jim Schneider, the CEO, has asked you to prepare some financial budgets for the 2011/12
financial year as a preliminary overview of the financial year ahead. He asked you to first
prepare a 12 months budget and then break it up over the four quarters. The areas he is
particularly interested in seeing is:
1. Sales budget for 2011/12 by department by quarter.
2. Profit budget (including detailed expenses) for 2011/12 by quarter.
3. The cash flow result per quarter of the GST after adjusting the GST collected by the
allowable GST tax credits.
4. The anticipated aged debtors summary at the end of each quarter.

The CEO wants to be given all the budgets except for the aged debtors budget which the
accountant and accounts receivable clerk can monitor. The CEO produced a summary of the
current business plan that covered the budget year to highlight some of the key goals,
objectives and strategies he would like incorporated into the budget.
Business plan summary

1. The anticipation that the coming financial year would maintain the same sales
growth as the growth that took place between 2007/08 to 2010/11.
2. To budget for an increase in inflation to 4% per annum and that all costs subject
to inflation should incorporate this particular increase.
3. A new car costing $97,466 including GST has been planned for in the coming
period to replace the five year old vehicle currently used by the chairman. This
fuel inefficient car will attract a luxury car tax.
4. Sales breakup over the departments is anticipated to be bathroom fittings 30%,
bedroom fittings 25%, mirrors 15% and decorative items 10% together with the
recently added lighting fixtures 20%.
5. Profits are to be built on securing a growing customer base which will generate
loyalty sales and become the refer other customers to the organisation. The
superior after-sales service is the key strategy to achieve this.
6. Reduction on the principle of the loan by a payment of $100,000 on the 31
December 2011 from the profits generated by the business.
7. One objective in this plan is to manage the debtors more efficiently in the current
period. This will involve an analysis of the debtors to identify ways to reduce the
amount of cash tied up in outstanding debtors.
8. The expectation that 2011/12 would be a difficult trading year but that the budget
net profit should target the same result as achieved in the 2010/11. The strategy
to achieve this in the business plan included three key elements:
a. To reduce the expected gross profit rate by 1% on the 2010/11 result in the
hope that lower prices on the products would help maintain the sales
growth even in difficult trading conditions.
b. To increase the advertising budget by $70,000 over the 2010/11 results in
the hope that Houzit can secure a greater market share in a constricting
market. $200,000 is planned for the first quarter with the balance
apportioned equally over the following three quarters.
c. To increase wages and salaries by $172,500 over the 2010/11 amounts in
the hope that allowing the existing high number of casual staff to earn
commissions on sales that should help to maintain Houzit’s sales growth.
After going through the business plan summary, the CEO gave you the previous year’s
financial reports and asked you to speak with the accountant Celina Patel to get some of the
figures and detailed expectations for the coming year.
You arrange a meeting with Celina Patel, Houzit’s accountant, and she gives you the
following insight into the historical expense relationships and the current statutory compliance
liabilities.

Sales and profit budget information

Celina explained that the only budget she monitors on a day-to-day basis is the cash flow
budget and the store manager is primarily responsible for the sales budget.
These are the notes you take at the meeting:
● The overall sales for 2011/12 target set by the business plan should be apportioned
across the quarters in the same % as was achieved in 2010/11.
This was:

Qtr 1 Qtr 2 Qtr 3 Qtr 4 2010/11

3,142,822 3,771,386 4,085,668 4,714,232 15,714,108

● Cost of goods sold is the inverse of the gross profit rate determined by the business plan
and is determined by the quarterly sales budget.
● Accounting fees have been negotiated for the year at a fixed amount of $10,000 to be
paid in equal amounts each quarter.
● The interest charges on the bank loan are anticipated at a reduced amount of $84,508
due to an agreed repayment of some of the loan principal. This is to be paid in equal
amounts each quarter.
● Bank charges are expected to be the same as 2011 and paid in equal amounts each
quarter.
● Celina has requested that a new expense (store supplies) be recognised in the new
budget that was previously included in with the cleaning expense amounts. Store
supplies in the 2009/10 results was $3,500 of the cleaning expense and $3,605 of the
2010/11 result. Cleaning expense will then be lower but identify the real labour costs
involved in the cleaning expense.
● Depreciation is expected to be the same as 2011 and allocated in equal amounts each
quarter.
● Advertising is to be apportioned to each quarter based on the business plan.
● The following expenses are expected to increase by the determined inflation rate in the
business plan summary:
○ Insurance – apportioned in equal amounts each quarter.
○ Store supplies – is calculated for to each quarter using the same % as determined
by the sales for each quarter.
○ Cleaning – is calculated for each quarter using the same % as determined by the
sales for each quarter.
 ○ Repairs and maintenance – apportioned in equal amounts each quarter.
○ Rent – apportioned in equal amounts each quarter.
○ Telephone – is calculated for to each quarter using the same % as determined by
the sales for each quarter.
○ Electricity – is calculated for to each quarter using the same % as determined by
the sales for each quarter.
● Fringe benefits tax is expected to be the same as 2011 and paid in equal amounts each
quarter.
● Wages and salaries are calculated for each quarter using the same % as determined by
the sales for each quarter.
● The statutory requirements are:
○ superannuation is 9.5% of wages and salaries for each quarter
○ payroll tax is 4.75% of wages and salaries for each quarter
○ workers compensation is 2% of wages and salaries for each quarter
○ company tax is 30% of net profit before tax for each quarter.
○ LCT tax is 33%. LCT threshold for fuel efficient cars is $77 565 and for non-fuel
efficient cars is $68 740.
 Houzit Pty Ltd

For 12 months ended

Profit & Loss Actuals 2007/08 2008/09 2009/10 2010/11

Revenue

Sales 12,474,336 13,472,315 14,550,100 15,714,108

– Cost Of Goods Sold 6,860,901 7,409,773 8,002,555 8,799,900

Gross Profit 5,613,465 6,062,542 6,547,545 6,914,208

Expenses

– Accounting Fees 5,500 6,500 8,500 9,000

– Interest Expense 45,000 65,000 96,508 90,508

– Bank Charges 1,200 1,300 1,580 1,600

– Depreciation 170,000 170,000 170,000 170,000

– Insurance 12,500 12,500 12,500 12,875

– Store Supplies - - - -

– Advertising 50,000 100,000 280,000 280,000

– Cleaning 12,560 15,652 18,700 19,261

– Repairs & Maintenance 40,250 52,600 60,000 61,800

– Rent 2,465,000 2,465,000 2,465,000 2,538,950

– Telephone 9,862 12,523 14,000 14,420

– Electricity Expense 22,500 23,658 25,000 25,750

– Luxury Car Tax - - 12,400 -

– Fringe Benefits Tax 26,000 26,000 26,000 28,000

– Superannuation 148,500 160,737 166,500 171,495

– Wages & Salaries 1,649,998 1,785,965 1,850,000 1,905,500

– Payroll Tax 78,375 84,833 87,875 90,511

– Workers’ Compensation 33,000 35,719 37,000 38,110

Total Expenses 4,770,245 5,017,987 5,331,563 5,457,780

Net Profit (Before Tax) 843,220 1,044,554 1,215,982 1,456,428

Income Tax 252,966 313,366 364,795 436,928

Net Profit 590,254 731,188 851,188 1,019,499

 Houzit Pty Ltd
Statement of Financial Position
As at 30 June 2009/10 2010/11
Assets
Current Assets
– Cash On Hand 50,000 55,000
– Cheque Account 144,842 160,314
– Deposits Paid 950,000 950,000
– Trade Debtors 850,000 975,000
– Merchandise Inventory 1,530,000 1,430,000
Total Current Assets
Fixed Assets
– Motor Vehicles At Cost 500,000 500,000
– Motor Vehicles Accum Dep ( 100,000 ) ( 125,000 )
– Furniture & Fixtures At Cost 1,950,000 2,250,000
– Furniture & Fixtures Accum Dep ( 650,000 ) ( 770,000 )
– Office Equip At Cost 400,000 400,000
– Office Equip Accum Dep ( 90,000 ) ( 115,000 )
Total Fixed Assets 2,010,000 2,140,000
Total Assets 5,534,842 5,710,314
Liabilities
Current Liabilities
– MasterCard 17,800 14,860
– Trade Creditors 780,000 679,000
– GST Collected 1,455,010 1,571,411
– GST Paid ( 943,125 ) ( 987,626 )
– Superannuation Payable 100,000 120,000
– Luxury Car Tax Payable 20,920 -
– income Tax Payable 364,795 436,928
– PAYG Withholding Payable 65,000 44,872
Total Current Liabilities 1,860,400 1,879,445
Long-Term Liabilities - -
– Bank Loans 1,608,459 1,508,459
Total Liabilities 3,468,859 3,387,904
Equity
– Owner/Shareholder’s Equity 500,000 500,000
– Retained Earnings 850,000 1,565,982
– Dividends Paid ( 500,000 ) ( 1,200,000 )
– Current Year Earnings 1,215,982 1,456,428
Total Equity 2,065,982 2,322,410
Internal auditor
Carl Kerns is one of the directors of the board. Carl said that as a board member they are
given the profit and cash flow budgets. He was appointed by the board to conduct an internal
audit of operations to look for weaknesses in the internal control system. His report uncovered
the following processes that he believed needed to be strengthened.
● While the overall customer base is increasing from year to year, there may be internal
control issues relating to how these new customers are secured.
● Some discounts that were being given to customers were recorded as a net amount on
the invoices and gave no indication of the discount from standard prices.
● Some cash registers in the stores were not reconciling the cash in drawer with the
register printout.
● Not all timesheet overtime amounts were being authorised by the line manager.

● Service invoices for some items of equipment were not signed or linked to a purchase
order. There was no check that the work had actually been carried out.
● Not all assets in the stores had unique codes fixed to the asset.

● There was minimal feedback lines of communication from the shop floor to head office,
particularly when an error in the budgeting report process was recognised.
● Debtor reconciliations were not done monthly and sometimes not at all.

● In busy times the cashiers that operated the registers were also asked to do their own
reconciliations and banking. Sometimes the cash was held in the store for a day or two.
● Job roles were not clearly defined so that responsibilities and liability can be identified.

● There was little rostering of duties and cash receipts were not pre-numbered.

Of particular concern to Carl was the directive given by the board to ensure that audit trails
were created and maintained. These included:
● Signing the timesheets for employees under the authority of a department manager.

● Maintenance of a numbered cash receipts book.

● Using sequenced cheques as a systematic way of evidencing all monies paid out.

● Ensuring proper coding of evidenced transactions against appropriate general ledger

account and cost centre.
● Ensuring reconciliations between company books and third-party bank statements are
performed.

● Establishing procedures including pre-authorisation and checking mechanisms for

work-related meal expenses.
GST cash flow budget
Statutory requirements for GST is 10% of the recorded amounts in sales. The only capital
purchase planned for the year is the luxury car for the chairman. Those expense payments on
which 10% GST was paid include the following:
● Cost of goods sold:

○ accounting fees
○ insurance
○ store supplies
○ advertising
○ cleaning
○ repairs and maintenance
○ rent
○ telephone
○ electricity expense.

The GST amount payable each quarter is the difference between the GST collected from sales
and the GST paid – format as per policy and procedures.

CASH FLOW ANALYSIS –

GST 2011/12 Qtr 1 Qtr 2 Qtr 3 Qtr 4

GST Collected x,xxx x,xxx x,xxx x,xxx x,xxx

Less GST Paid x,xxx x,xxx x,xxx x,xxx x,xxx

GST Payable Calculation Calculation Calculation Calculation Calculation

Debtors ageing budget

The historical records show that the debtors balance at the end of each quarter is usually about
20% of the quarter’s sales. At any time in the debtors balances 1% of the total debtors is
overdue 90 days and over, 5% is 60 days overdue, 10% is 30 days overdue and the balance of
the total debtors is current. The aged debtors’ budgets are only distributed to the accountant
and the accounts receivable clerk.