RMIT Classification: Trusted

Topic 1 : What is ‘accounting’, what do ‘accountants’ do, and why? What are
Organisations?
Tutorial questions
Fab Cycle Clothing (initially called FabTwist)

(Note: this case study will be used throughout the semester. For each topic’s activities,
you will be provided with additional information about Fab Cycle Clothing that is
relevant for those activities as we work through the case study during the semester)

Introduction

Neena and Emma have been close friends since secondary school. As far as they could both
remember, they loved art and fashion since childhood. Eventually this will bring them together
as partners in their business, Fab Cycle Clothing. While in secondary school, Neena worked
in a garment shop and assisted in arranging the display window. Whereas Emma worked as
a cashier at a retail store. Their love for creativity and passion for fashion led them to pursue
a bachelor’s degree in Fashion Design at RMIT University.
Neena had a knack for designing so she started freelancing in designing new fashion and
sending them to local boutiques as a part time job while finishing her degree. The local
boutiques were very pleased with Neena’s designs and she would often work on making
garments for clients according to the customer’s wishes. apart from her design work. Emma
started working as a part time sales associate at a local retail store. They both aspired to work
independently one day and wanted to turn their passion for fashion into a business.

After finishing their degrees, Emma was offered the role of an Account manager on a full-time
basis by a wholesale fashion company. Her role included promoting store products to different
department stores and building a client portfolio. However, Neena decided to open a small
boutique and operate as a sole trader. She named the boutique ‘Fabtwist’. The business
focused on selling a casual clothing line for women comprising of dresses, tops and pants
designed by her, focusing on simplicity, comfort, and elegance. She decided to follow a ‘buy
and sell boutiques’ model where she would buy clothes at a wholesale price from
manufacturers or distributors and sell them at a higher mark up to the customer. At the same
time, she would also continue to design clothes for her old customer clientele.

Neena started her business by leasing a shop in a commercial area. Over time, Neena’s
business grew with increasing enquiries from wholesale clothing vendors interested in her
clothing line. With increasing demand locally and from other vendors, she eventually realised
she needed extra help. The time had come to see if Emma wanted to join her business. Emma
willingly agreed and arranged with her employer to work only three days a week, devoting the
rest of her time to working with Neena in her business for which she was paid a wage.

They continued to work in the leased shop together. With Emma now part of the business,
Neena was able to concentrate on designing the clothes and Emma focused on dealing with
clients and sales promotions.

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Both Neena and Emma had the same vision for their business – to provide customers with
best-value quality clothes which are simple but stylish and most importantly durable. To
accomplish this for their clothing line, they decided to review the material used by distributors
from whom they buy ready-made clothes, and the fabric supplier Neena uses for her custom
designed clothes. They are aware of the importance of fabric quality and its durability for the
success of their business, hence they wanted to ensure that the distributors and suppliers
meet their standards.

As the business was expanding, and Emma had joined Neena, they agreed it was important
to have an online presence if they wanted to keep the business growing. Neither had any
experience in website design, so they hired a friend from University, Zhen, who had completed
some RMIT short courses in Web Design. Zhen developed a website for the business, which
allowed potential customers to view the clothing line the business offered and then order on-
line.

Soon they realised that they no longer had the required storage space with the growing
business so they leased a warehouse for this purpose. Also, Neena and Emma decided to
hire two RMIT students to fill in the part-time positions of a sales associate and an operations
assistant in their business. Neena and Emma were undertaking these roles on the days these
employees were not working.

During the first six months of working together, the new website brought in many new
customers and the business picked up sales quickly. Eventually Emma decided that she would
resign from her job as an Account manager and work full-time in the Fabtwist business. After
some discussion, Neena and Emma have decided to set their business up as a formal
business partnership as they believe this would provide them with certain benefits that the
existing structure could not.

Additional Information
In anticipation of becoming a partner in the business, Emma asked to have a look at Neena’s
accounting records. Whilst Emma was no accounting genius, she does have great commercial
sense and is savvy with numbers. She was shocked to see that Neena kept all her invoices
and receipts in a big cardboard box! It was clear she didn’t know really know exactly how much
money the business was making or what its costs were. She simply gave the box to her tax
agent at the end of each financial year so she could work out if she made any profit and if she
had any tax liability. Neena knew that the business would fail with this approach and there had
to be a better way to manage the business, and for the partnership to survive.

Activity 1
Neena and Emma want to make sure they have made the right decision to set up their
business as a partnership. They have asked you to answer the following questions:

a) What type of business structure was Neena’s business, Fabtwist, prior to becoming a
partnership? Explain your answer.
b) Identify the similarities and differences between a partnership and Neena’s initial
business structure for Fabtwist.
c) Advise Neena and Emma on four factors that should be considered before deciding
what form of business structure to operate under.
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Activity 2
After forming their partnership, Neena and Emma now have equal ownership in their business
and as such wish to ensure that they have each contributed equal resources into the business.
a) From the information provided in the case study background, identify the resources
that Neena and Emma could each contribute to the business.

b) A partnership agreement helps in avoiding disputes and disagreements, though this

agreement doesn’t have to formally exist. Advise Neena and Emma, which details
should be specified in this agreement.

c) Reporting and accounting requirements are different for a sole trader as compared to
a partnership. Identify who a partnership would report to and what type of accounting
reports Neena and Emma’s partnership will produce.

Case 2 – Matt and Sue

Matt and Sue have been friends for over 12 years. They were both enrolled in a business degree at
RMIT, but Matt majored in Accounting and Sue majored in Marketing. Eventually, Matt accepted the
role of a management accountant in an insurance company. Sue is now working as the Marketing
manager for Qantas. One of the important roles for Matt to perform was compiling the annual budget
with senior management and preparing cashflow forecasts.
Recently Matt and Sue were having dinner with a few friends when a discussion started about the
recent purchase of a building for $5,000,000 near its headquarters at Sydney Airport. Sue mentioned
that this building will be recorded in the Balance Sheet of Qantas and is useful information for
internal management. You and your group members were sitting at the next table and couldn’t help
overhearing the discussion. Part of the conversation you heard is repeated below.
Sue: “Information disclosed in the Income Statement and Balance Sheet are mostly useful for the internal
manager. In the Income Statement Qantas reports that the business made a total loss of
$2,700,000 for the last financial year. Of course, this is management accounting information”. Matt:
“No, in my opinion this would be financial accounting information”.
Sue: “Okay, then what about the total assets, including the recent purchase of the building, which is owned
and controlled by the business? These assets were included the Balance Sheet for the last financial year. I
believe management accountants see this type of information as useful. What do you think?
Matt: “I would still say this is financial accounting information. There is a distinction between the type of
decision making and reports financial accountants and management accountants prepare. But at the same
time there will be an interaction in an organisation between these two types of accounting at some stage”.

Sue: “Seems like I’ve clearly forgotten what “management accounting” is then”?

Question 1
Provide an explanation to Sue of the role of ‘management’ accounting” and contrast this to the role
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of ‘financial’ accounting”. In your response, make sure you identify the types of decisions that differ
between the two streams of accounting.

Question 2
(a) Explain why the two examples of information Sue gave would not be classified as
‘management’ accounting information and therefore not useful to internal management. In your
response, make sure you refer to at least four (4) specific differences between management and
financial accounting information.

(b) Matt mentioned that there will be an interaction in an organisation between these two types of
accounting at some stage. Provide an example of this interaction using Qantas as an example.