Pawsome Beds is a small business that manufactures premium cat beds for retail customers. The owner, Melissa Chen, started the business from her home studio during 2021 when she discovered a gap in the market for handcrafted pet furniture. She makes the beds herself and occasionally hires a
friend on a casual basis. The financial statements for the year ending 30 June 2025 are provided below. Pawsome Beds Income statement for the year ending 30 June 2025 [table]
Income Sales revenue Gain on sale of equipment | $ 145,000 2000 | $ 147,000 Less Cost of sales Gross profit and other income | | 118,000 29,000 Less expenses Operating expenses Wages expense Depreciation expense Interest expense Advertising expense | 3,200 11,500 2,000 1,400 2,600 | 20,700 Profit | | 8,300
[/table] Pawsome Beds Statement of Changes in Equity for the year ending 30 June 2025 [table]
| $ Opening capital | 52,400 Additional capital | 6,200 Profit | 8,300 Drawings | (2,100) Closing capital | 64,800
[/table] Pawsome Beds Balance Sheets as at 30 June: [table]
| 2025 $ | 2024 $
Current Assets | | Cash | 5,800 | 3,400 Accounts receivable | 5,600 | 7,200 Prepaid advertising expenses | 3,800 | 2,600 Inventory | 4,200 | 5,800 Total Current Assets | 19,400 | 19,000 Non-Current Assets | | Equipment | 88,000 | 81,000 Accumulated Depreciation | (12,000) | (14,000) Total Non-Current Assets | 76,000 | 67,000 Total Assets | $95,400 | 86,000 Current Liabilities | | Accounts payable | 4,800 | 6,200 Accrued wages | 1,200 | 1,600 Operating expenses payable | 600 | 800 Total Current Liabilities | 6,600 | 8,600 Non-Current Liabilities | | Bank Loan | 24,000 | 25,000 Total Non-Current Liabilities | 24,000 | 25,000 Owner’s Equity | | Capital | 64,800 | 52,400 | | Total Liabilities and Owner’s Equity | $95,400 | $86,000
[/table] Pawsome Beds Statement of Cash Flows for the year ended 30 June 2025 [table]
Cash flows from Operating Activities Cash received from customers Cash paid to suppliers Cash paid for wages and operating expenses Cash paid for interest Cash paid for advertising Net cash flow from Operating Activities | 136,600 (107,800) (15,300) (1,400) (3,800) | 8,300 Cash flows from Investing Activities Cash paid for equipment Cash received from the sale of equipment Net cash flow from Investing Activities | (17,000) 8,000 | (9,000) Cash flows from Financing Activities Cash paid for loan repayment Cash received from capital Cash paid for owner drawings Net cash flow from Financing Activities | (1,000) 6,200 (2,100) | 3,100 Net Cash Flow | | 2,400 Cash balance at the beginning of the year | | 3,400 Cash balance at the end of the year | | 5,800
[/table] Other information: [table]
| 2025 | 2024 Debt ratio | 32.1% | 39.1% Interest coverage ratio | 6.9 times | (2.1 times)
[/table][Fill in the blank]
Should Melissa be pleased that her equity has increased during 2024–2025? Explain your answer with reference to the financial statements.[Fill in the blank]
Comment on the financial risk of Pawsome Beds over the two years 2024–2025. Use the ratios and data provided in your answer.[Fill in the blank]
The owner indicated that profit in 2025 was significantly higher than the prior year. Provide two feasible explanations for how this improvement may have occurred.[Fill in the blank]
Melissa is considering expanding her range to include custom-built cat beds designed to customer specifications. How might her (i) gross profit margin and (ii) net profit margin be affected? Explain.[Fill in the blank]
The business reported a profit of $8,300 for 2024–2025. Under what circumstances might this profit level be acceptable to Melissa? Explain your reasoning.[Fill in the blank]
Interpret the information associated with the cash flow of Pawsome Beds during 2025.[Fill in the blank]