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4. Do you believe Lavinias first three-months of operation could be characterized as successful? Explain your answers.

Yes, we found out that the operation of Pens and Pencils Discovery World is successful in the first three-months. This is because there is a net profit of RM890 shows in the Statement of Comprehensive Income from the April to June of the business. Due to the gross profit in this business is RM4980 which is the sales of RM7400 minus the cost of goods sold of RM2420. Then, the gross profit only minus the expenses of RM4090 since there is no revenue in the three-months. Inside the expenses, there was a depreciation take place among the three-months. The depreciation that is compute in the Statement of Comprehensive Income will less the amount of net income and thus this will influence the capital in the Statement of Financial Position. Besides, the Statement of Financial Position also shows that there was a provision of depreciation (the sum of depreciation for each item) on computer and machinery which will decrease the net value of each item and thus cause the amount total fixed asset of business drop. Other expenses which include rental expense, wages expense, supplies, interest on loan, and advertising expense also decline the amount of net income. Nevertheless, there was a profit in Pen and Pencils Discovery World due to the sales still can cover the expenses after deduct the cost of goods sold of RM2420. Moreover, the amount of assets of Pen and Pencils Discovery World is higher than the liabilities in the business. The total assets which include the non-current assets and the current assets is RM12350 while the long term liability is RM10000 and the current liabilities is RM560 thus total is RM10560. This represents that the total assets owned are

more than the liabilities about RM1790. Therefore, Lavinia still can continue to operate since she is earned profit in her business. However, the sum of liabilities is higher than the sum of equities, this means that Lavinia is used liability rather than equity to support their business. This can prove from the Statement of Financial Position as at June 2012 as the sum of liability is RM10560 while Lavinia obtains positive equity of RM1790 after add the net profit of RM890. Due to the positive equity is less than the sum of its liabilities, in which case the business is completely "owned" by the creditors. As a result, Lavinia will force into bankruptcy because of the difficulties in financing long-term debt of RM10000 and the heavy burden the interest charges of 6% bring to bear on the business operating cash flow and bottom line. Nevertheless, if Lavinia continue operate her business in net profit, she still able to cover the liabilities owed by the business. Furthermore, there were also some accrual expenses in current liabilities and will deduct it from the account later. This is because she will pay the expenses later but record it when the purchase is occurred, whether it is the delivery of a product or the rendering of a service, regardless of when Lavinia gets paid. Therefore, Lavinia have to record the expense when she receives the goods or services, even though she may not pay for them until later. However, as compared to cash-basis accounting, the accrual basis is less flexible in the recognition expenses. With cash basis, business owners can control when they receive payments or pay bills, giving them more flexibility about their liability. This is generally not available under the accrual basis of accounting. Since the sum of assets is higher than the sum of liabilities so Lavinia still able to pay the liabilities.