Case Study – Financial Statement Analysis
Case Study – Financial Statement Analysis
Deliverables Chart Time Line Week Assignment 01 Case Study – Financial Accounting: Excel file – Module 01 Page 1, Page 2 and Page 3 02 Case Study – Financial Statement Analysis: Excel file – Module 02 Page 1, Page 2 and Page 3 03 Case Study – Full Disclosure in Financial Reporting and Management Responsibility: Excel file – Module 03 Page 1 and Page 2 04 Case Study – Management Decision: Excel file – Module 04 Page 1 and Page 2 05 Case Study – Professional Business Ethics and Internal Control: Excel file – Module 05 Page 1, Page 2 and Page 3 06 Case Study – Presentation and Final Exam Requirements Your final deliverable is a Case Study presentation addressed to your instructor which outlines the financial situation of the company. In this proposal, you will comment on each of the business areas or challenges outlined in the timeline above (e.g. Financial Accounting, Financial Statement Analysis, and so on). The proposal should include adequate and credible research to support your decision about these areas or challenges. In addition, when outside sources are used, you must include APA-style in-text citations and a reference list. For more information on APA, visit the APA Guide: http://guides.rasmussen.edu/apa Due Date Your final project is due in Module 6. The Case Study project is the main project for this course and will be due along the way. The assignments and modules that are due are noted in bold in the timeline below. As you can see, your first assignment “Case Study – Financial Reporting” is due in Module 01. Evaluation Each assignment leading up to the final project is evaluated and graded independently. Your instructor will provide specific grading criteria for each step of the project prior to its due date. Case Study Introduction Transferable Skills are a set of essential abilities that will position students for success as they develop and build their careers. College faculty and staff believe it is important that all Rasmussen graduates develop these skill sets, as having expertise in these areas will be beneficial throughout one’s life. Employers have also identified these skills as being essential in well-rounded employees. In this course, you will have the opportunity to learn and demonstrate each of these skills. These skills will be measured as a portion of our course project that has been designed to replicate an authentic workplace project. These skills are the following: Communication, Critical Thinking, Digital Fluency, Diversity and Teamwork, Ethics and Professional Responsibility, and Information Literacy. How can I learn more about the Transferrable Skills? Rasmussen College faculty and staff have worked together to create a visual guide to each of the Transferable Skills. You are able to view the entire set of six guides at the following location: http://guides.rasmussen.edu/transferableskills This Case Study is the major lesson material for this course and incorporates the use of transferable skills. Case Study Company Name: GolfPro Center Introduction Millions of people every day must make informed decisions about organizations. To make the decisions these people need information. Accountants measure the activities of an organization and communicate those measurements to others. Accounting information provided for internal users, such as managers, is referred to as managerial accounting; accounting information provided to external users is referred to as financial accounting. The two functions of financial accounting are to measure business activities of a company and then to communicate those measurements to external parties for decisionmaking purposes. GolfPro Center Let’s say you are ready to begin your new venture of working as the Accounting Manager for a new start-up golf center called GolfPro Center. The purpose of the golf center is to provide PGA-certified golf instruction and essentials to customers, such as junior players to develop their opportunity for top university programs. By using the base network of customers, the company intends to expand to sell nationwide as an integrated multi-channel retailer. The target market of junior league will be to individual golf pro shops, golf teams and eventually lead to selling through an online store. In additional to future new store openings, a significant part of the company’s strategy is to continue to enhance the internet aspects of the direct to customer channel. The plan also entails the ongoing development of their own brand portfolio as they continue to grow. Golf Industry The golf retail industry is highly fragmented among mass merchants, off course specialty retailers, Internet merchants, warehouse type merchants and on course pro shops. The off course specialty golf retail industry has become extremely competitive as general sporting goods or their golf specialty retails have expanded their markets. The company will face competition as competitors enter the marketplace in the existing markets. Company Information Steve Smith is the owner and Chief Executive Officer of the company. He has appointed a close family member, Mike Smith as the Chief Financial Officer. You were recently hired by Mike Smith as the Accounting Manager. Your first main function is to set up the accounting department structure and financial statements. The corporate office is located in Chandler, Arizona. Let’s look at some initial activities of functions within the new company. The company opened business on December 1, 2016. You also started employment on this same date. You have been tasked with setting up the accounting department and internal control process. The financial statements, which you will prepare, will be the first set of financials for the company. You will also be tasked with setting up the financial notes and management’s discussion and analysis portion of the financial statements. This will include company information, accounting policies, revenue recognition and inventory components. You will also encounter a few ethical situations along the way which will define your accounting educational activities. Let’s talk about how the company developed the investment for opening the business. The company needed about $35,000 to get the business up and going. Since the company did not have that amount of money to start the business, they began looking for investors. With their money, investors buy ownership in the company and have the right to share in the organizations profits. Each share of ownership is typically referred to as a share of common stock. For GolfPro Center they sell 1,000 shares of common stock for $25 each, receiving cash of $25,000 from investors. The 1,000 shares include 300 sold to family for $7,500, giving them 30% (= 300/1,000) ownership in the company. The company also offered you 100 shares for $2,500, giving you 10% ownership. The remaining 600 shares include 300 to extended partners, 200 to a friend, and 100 to the owners childhood golf coach. The company now has $25,000 from investors. To raise the remaining cash needed, the company will borrow $10,000 from a local bank, which is agreed to repay within three years. Thus, the bank is the creditor. Now, with the $35,000 of cash obtained from investors and creditors, the company buys equipment. This equipment costs $24,000, leaving $11,000 cash for future use. At this point, the company has the following resources that can be used for operations. The investors and creditors has the claims to the company’s resources. Creditors have claims equal to the amount loaned to the company, $10,000. In other words, $10,000 of the company’s resources are promised to the local bank. Investors have claims to all remaining resources, $25,000. You manage the resources of the company on behalf of the owners (stockholders, in this case), while the owner is also an investor this will help in aligning the interests with the other investors in the company. This is common in many start-up businesses. Formally defined, a corporation is a company that is legally separate from its owners. The advantage of being legally separate is that the stockholders have limited liability. Limited liability prevents stockholders from being held personally responsible for the financial obligations of the corporation. Stockholders of GolfPro Center can lose their investment of $25,000 if the company fails, but they cannot lose any of their personal assets (such as homes, cars, computers, and furniture). Other common business forms include sole proprietorships and partnerships. A sole proprietorship is a business owned by one person; a partnership is a business owned by two or more persons. If the owner had decided to start GolfPro Center without outside investors, he would have formed a sole proprietorship. However, because he did not have the necessary resources to start the business, being a sole proprietorship (or even one member of a partnership) was not a viable option. Thus, a disadvantage of selecting the sole proprietorship or partnership form of business is that owners must have sufficient personal funds to finance the business in addition to the ability to borrow money. Another disadvantage of being a sole proprietorship or partnership is that neither offers limited liability. Owners (and partners) are held personally responsible for the activities of the business. Sole proprietorships and partnerships do offer the advantage of lower taxes compared to corporations. Sole proprietorships and partnerships are taxed at the owner’s personal income tax rate, which is typically lower than the corporate income tax rate. In addition, a corporation’s income is taxed twice (known as double taxation): (1) the company first pays corporate income taxes on income it earns and (2) stockholders then pay personal income taxes when the company distributes that income as dividends to them. What information would GolfPro Center’s investors and creditors be interested in knowing to determine whether their investment in the company was a good decision? Ultimately, investors and creditors want to know about the company’s resources and their claims to those resources. Accounting uses some conventional names to describe such resources and claims. GolfPro Center has a liability of $10,000 to the local bank. Other examples of liabilities would be amounts owed to suppliers, employees, utility companies, and the government (in the form of taxes). Liabilities are claims that must be paid by a specified date. Investors, or owners, have claims to any resources of the company not owed to creditors. Therefore GolfPro Center, this amount is $25,000. We refer to owners’ claims to resources as stockholders’ equity, because stockholders are the owners. The relationship among the three measurement categories is called the accounting equation. GolfPo Center has assets of $35,000 and liabilities of $10,000. The stockholder equity is $25,000. Of course, all owners hope their claims to the company’s resources increase over time. This increase occurs when the company makes a profit. Stockholders claim all resources in excess of amounts owed to creditors; thus, profits of the company are claimed solely by stockholders. You will calculate the company’s profits by comparing its revenues and expenses. Revenues are the amounts recorded when the company sells products or provides services to customers. For example, when you or one of your employees provides golf training to a customer, the company records revenue. However, as you’ve probably heard, “It takes money to make money.” To operate the academy, you’ll encounter many costs. For example, you’ll have costs related to salaries, rent, supplies, and utilities. You’ll notice the use of the term net to describe a company’s profitability. In business, the term net is used often to describe the difference between two amounts. Here, we measure revenues net of (or minus) expenses, to calculate the net income or net loss. If we assume that by the end of the first month of operations GolfPro Center has total revenues of $7,200 and total expenses of $6,000, then we would say that the company has net income of $1,200 for the month. This amount of profit increases stockholders’ claims to resources but has no effect on creditors’ claims. When the company has positive net income, it will either distribute those profits back to its stockholders or retain those profits to pay for future operations. For example, suppose you decide that because GolfPro Center has net income of $1,200, a cash payment of $200 should be returned to stockholders at the end of the month. These cash payments to stockholders are called dividends. The other $1,000 of net income adds to stockholders’ equity of the company. Thus, when GolfPro Center has net income of $1,200, stockholders receive a total benefit of $1,200, equal to $200 of dividends received plus $1,000 increase in stockholders’ equity in the company they own. Let’s now proceed to the your new journey in accounting with GolfPro Center. Module 01: Financial Accounting Preparing the Financial Statements Your function as accounting manager is to prepare the financial statements for the first operating period of December 2016. The December 31, 2016 adjusted trial balance for GolfPro Center is presented below. Using the Trial Balance, complete the following: 1. Prepare an income statement for the year ended December 31, 2016 2. Prepare a statement of stockholder’s equity for the year ended December 31, 2016 assuming no common stock was issued during 2016. 3. Prepare a classified balance sheet as of December 31, 2016. Keep in mind, the beginning balances are zero only because this is the first month of operations for GolfPro Center. GolfPro Center Trial Balance December 31, 2016 For the period ending December 31, 2016 Accounts Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation Accounts Payable Salaries Payable Utilities Payable Deferred Revenue Interest Payable Notes Payable Common Stock Retained Earnings Dividends Service Revenue Rent Expense Supplies Expense Depreciation Expense Salaries Expense Utilities Expense Interest Expense Total 1 Debit $ Credit 6,900 2,700 1,300 5,500 24,000 $ 400 2,300 300 900 400 100 10,000 25,000 0 200 7,200 $ 500 1,000 400 3,100 900 100 46,600 $ 46,600 GolfPro Center Income Statement For the period ended December 31, 2016 Revenues Service Revenue Expenses Rent Expense Supplies Expense Depreciation Expense Salaries Expense Utilities Expense Interest Expense 7,200 500 1,000 400 3,100 900 100 Net Income 1,200 2 GolfPro Center Statement of Stockholder’s Equity For the period ended December 31, 2016 Accounts Beginning Balance (Dec 1) Issuance of common stock Add: Net Income for the period Less: Dividends Ending balance (Dec 31) Common Stock $ 0 25,000 Retained Earnings 1,200 200 1,000 Total Stockholders Equity 3 GolfPro Center Balance Sheet For the period ended December 31, 2016 Assets Current Assets: Cash Accounts Receivable Supplies Prepaid Rent Total Current Assets Long Term Assets: Equipment Less: Accumulated Depreciation Total Long term assets Total Assets 4 5 6 $ $ 6,900 2,700 1,300 5,500 16,400 $ 24,000 400 23,600 $ 40,000 Liabilities Current Liabilities: Accounts Payable Salaries Payable Utilities Payable Deferred Revenue Interest Payable Total Current Liabilities $ $ $ $ $ $ Long Term Liabilities: Notes Payable Total Liabilities 10,000 $ 14,000 Stockholder’s Equity Common Stock Retained Earnings Total Stockholders Equity 25,000 1,000 $ 26,000 Total Liabilities & Stockholders Equity $ 40,000 2,300 300 900 400 100 4,000 Critical Thinking: Clarity and Precision Communication with CFO: In the complexity of preparing the financial statements, the CFO tells you that he prefers the single step income statement because the multiple step format seems to overstate the income. Express in a short declarative manner, how would you respond to this question? While the single-step income statement is less time-consuming to produce and offers a quick snapshot of the company’s revenues and expenses the multipoint income statement offers more details. As we are a new company who will be looking for investors we should want to provide as much detail about the company as possible. Communication: Language Usage Explain how financial accounting information is communicated through financial statements to internal and external users. Construct widely varied sentence types and advance grammatical concepts to explain insight. Financial accounting information is communicated through financial statements to both internal and external users. The ultimate goal of accounting is to provide information that is useful for decision-making. Internal users are those within an organization who use financial information to make day-to-day decisions, such as managers and other employees who use financial information to confirm past results and help make adjustments for future activities. External users are those outside of the organization who use the financial information to make decisions or to evaluate an entity’s performance. For example, investors, financial analysts, loan officers, governmental auditors, such as IRS agents, and an assortment of other stakeholders are classified as external users, while still having an interest in an organization’s financial information. Critical Thinking: Creativity and Innovation Describe the role that financial accounting plays in the decision making process. In your response, use human and/or professional in field knowledge through the creation of the response. Financial accounting is a crucial component of the decision-making process for businesses. It involves recording, summarizing, and reporting financial data that goes in and out of a company’s operations, which allows both company managers and outside investors and analysts to understand the company’s health and make informed decisions. Financial accounting provides a snapshot of a company’s financial health through a variety of statements, including the balance sheet and income statement, which can give investors and lenders more power in their decision-making. Module 01: Financial Accounting Cash Flow Statement The below information are transactions which analyze the cash effects on GolfPro Center. Use the information provided to complete the Statement of Cash Flow. External Transactions of GolfPro Center Type of Activity Is Cash Involved? Inflow or Outflow? Financing Yes Inflow Financing Yes Inflow Investing Yes Outflow Operating Yes Outflow Operating No — Operating Yes Inflow Operating No — 8 Receive cash in advance for 12 golf training Operating sessions to be given in the future $600 Yes Inflow 9 Pay salaries to employees $2800 Operating Yes Outflow 10 Pay cash dividends of $200 to shareholders. Financing Yes Outflow Transaction 1 2 3 4 5 6 7 1 External Transactions in December Sell shares of common stock for $25,000 to obtain funds necessary to start the business. Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years. Purchase equipment necessary for giving golf training, $24,000 cash Pay one year of rent in advance, $6000 ($500 per month). Purchase supplies on account, $2,300. Provide golf training to customers for cash, $4300 Provide golf training to customers on account $2000 GolfPro Center Statement of Cash Flow For the period ended December 31, 2016 Cash Flows from Operating Activities Cash inflows: From customers $ 4,900 Cash outflows: For salaries For rent Net cash flows from operating activities 2,800 6,000 (3,900) Cash Flows from investing Activities Purchase equipment Net Cash Flows from Investing Activities (24,000) (24,000) Cash Flows from Financing Activities Issue common stock Borrow from bank Pay dividends Net cash flows from financing activities Net increase in cash Cash at the beginning of the period Cash at the end of the period 25,000 10,000 200 34,800 $ 6,900 Communication: Audience and Delivery 2 In the space provided below, explain to the CEO and CFO the main purpose of the statement of cash flow. In your response, utilize effective persuasive techniques to influence and engage the CFO and CEO. The statement of cash flow is a financial statement that provides a detailed picture of what happened to a business’s cash during a specified period, known as the accounting period. It demonstrates an organization’s ability to operate in the short and long term, based on how much cash is flowing into and out of the business. Communication: Organization, Focus, and Supporting Examples 3 In the space provided below, explain to the CFO some of the activities reported on the statement of cash flows. In your response, coordinate your thoughts to synthesize and provide context regarding the concept of the statement of cash flows. Provide carefully integrated thoughts and examples to clarify the topic to the CFO. The statement of cash flows is divided into three sections: operating activities, investing activities, and financing activities. Operating activities include cash inflows and outflows from the company’s primary business activities, such as sales and purchases of inventory, payment of salaries and wages, and payment of taxes. Investing activities include cash inflows and outflows from the company’s investments in long-term assets, such as property, plant, and equipment, and investments in other companies. Financing activities include cash inflows and outflows from the company’s financing activities, such as issuing and repurchasing stock, paying dividends, and borrowing and repaying loans Communication: Organization, Focus, and Supporting Examples 4 In the space provided below, describe some of the investing activities on the GolfPro Center statement of cash flows. Use a variety of thoughts integrated to present the meaning of your evidence. As shown on the statement of cash flows, we invested in equipment. This new equipment will allow us to grow our company. As shown by our operating activities we did not go into negatives with this investment. This means we invested when we had the funds to do so. Communication: Content and Voice 5 Explain to the CEO and CFO the why the net income differs from the amount of cash flow from operating activities. In your response, explain the relationship between the net income and cash flows such as the investing and financing activities. Develop a response which incorporates a focus on uniting multi faceted mutually supportive arguments to create a distinct connection with the content and the audience. The net income and cash flow from operating activities are two different financial metrics that provide insights into a company’s financial health. Net income is the profit a company has earned for a period, while cash flow from operating activities measures, in part, the cash going in and out during a company’s day-to-day operations. The difference between net income and cash flow from operating activities can be attributed to non-cash expenses and changes in working capital. Non-cash expenses such as depreciation and amortization are added back to net income to calculate cash flow from operating activities. Changes in working capital, such as accounts receivable and accounts payable, also affect cash flow from operating activities. Module 01: Financial Accounting Closing Entry In the space provided below, prepare the Closing Entry for GofPro Center. Closing Entry for December 31, 2016 1 Journal Entry Account a Service Revenue Retained Earnings Comment: Close revenues to retained earnings. b Retained Earnings Rent Expense Supplies Expense Depreciation Expense Salaries Expense Utilities Expense Interest Expense Comment: Close expense to retained earnings. c Retained Earnings Dividends Comment: Close dividends to retained earnings Debit Credit 7,200 7,200 6,000 500 1,000 400 3,100 900 100 200 200 Critical Thinking: Definitions, Terms, Concepts and Ideas 2 Communication with CEO and CFO: In the space provided below, in a clear and concise manner, explain to the CEO and CFO the main purpose of these closing entries. The purpose of closing entries is to reset the temporary account balances to zero on the general ledger, which is the recordkeeping system for a company’s financial data. Temporary accounts are used to record accounting activity during a specific period. The balances of these accounts are eventually used to construct the income statement at the end of the fiscal year. The income statement is a financial statement that is used to portray a company’s financial performance and activities over a single fiscal year. 3 Critical Thinking: Definitions, Terms, Concepts and Ideas Communication with CEO and CFO: Comment on why adjusting entries are needed and what happens if certain adjusting entries are neglected. Adjusting entries are necessary to ensure that the financial statements of a company are accurate and reflect the correct financial position of the company. Adjusting entries are made at the end of an accounting period to align the revenues and expenses to the right period, to update the account balances before financial statements can be prepared, and to correct any mistakes made previously in the accounting period. There are four types of adjusting entries: accrued expenses, prepaid expenses, accrued revenues, and unearned revenues. Digital Fluency: Internet Technology Usage 4 Go to the FASB website, http://www.fasb.org, to access the FASB Concepts Statements. After you have read the documents, use the search tool in your Internet browser to respond to the following items. a) What is the objective of financial reporting? b) What other means are there of communicating information besides financial statements? c) Indicate the users and the information FASB is most directly concerned with in economic decision making. Financial reporting aims to provide information about a company’s or a business’s financial performance, position, and cash flow. This information is helpful for management, investors, creditors, and other users to analyze, track, and make decisions about the business. n addition to financial statements, there are other means of communicating information such as multidimensional graphics. This graphic technique helps individuals understand the relationships between financial variables and allows them to identify changes in the trend of the firm’s economic conditions more quickly than statistical models. The primary users of general-purpose financial reporting are present and potential investors, lenders, and other creditors, who use that information to make decisions about buying, selling, or holding equity or debt instruments, providing or settling loans or other forms of credit, or exercising rights to vote on, or otherwise influence, management’s actions that affect the use of the entity’s economic resources. Module 02: Financial Statement Analysis Interpret financial data by computing ratios. Using the GolfPro Center financial information prepared in Module 01, calculate the following ratios: Liquidity, Leverage and Profitability Ratios 1 Liquidity & Efficiency Analysis 1 Current Ratio 2 Total Asset Turnover 3 Accounts Receivable Turnover Ratio Formula Current Assets/Current Liability Net Sales/Average Total Assets Sales/Average Accounts Receivable December 2016 Ratio 4.10 0.18 2.67 2 Leverage Analysis 4 Debt to Equity Ratio 5 Debt Ratio 5 Times Interest Earned Ratio Formula Total Liabilities/Total Stockholders’ Equity Total Liabilities/Total Assets Income before Interest/Interest Expense December 2016 Ratio 54% 35% 1200% 3 Profitability Analysis Formula 6 Gross Profit Margin Ratio Gross Profit/Net Revenue 7 Profit Margin Ratio Net Income/Net Revenue 8 Return on Total Assets Income/Average Assets 9 Return on Common Stockholders’ EquityIncome/Average Equity December 2016 Ratio 31% 17% 0.03 0.05 Critical Thinking: Definitions, Terms, Concepts and Ideas In the space provided below, prepare a professional business report to the CFO by describing the analytical use of each of the nine ratios. Discuss what the financial ratios present and identify two ratios that would be most valuable as 4 a basis in a management decision for expanding sales. In your report, explain the relationship of the asset turnover to the return on assets. Liquidity Ratios: These ratios measure the ability of a company to meet its short-term obligations. The most common liquidity ratios are the current ratio and the quick ratio. Asset Management Ratios: These ratios measure how efficiently a company is using its assets to generate revenue. The most common asset management ratios are the inventory turnover ratio, the accounts receivable turnover ratio, and the total asset turnover ratio. Debt Management Ratios: These ratios measure how much debt a company has relative to its assets or equity. The most common debt management ratios are the debt-to-equity ratio and the interest coverage ratio. Profitability Ratios: These ratios measure how profitable a company is. The most common profitability ratios are the gross profit margin, the operating profit margin, and the net profit margin. Market Value Ratios: These ratios measure how investors perceive a company’s value. The most common market value ratios are the price-to-earnings ratio and the market-to-book ratio. Return on Equity (ROE): This ratio measures how much profit a company generates with the money shareholders have invested. Return on Assets (ROA): This ratio measures how much profit a company generates with the assets it has. Return on Investment (ROI): This ratio measures how much profit a company generates with the money it has invested. Earnings per Share (EPS): This ratio measures how much profit a company generates per share of stock. The two ratios that would be most valuable as a basis in a management decision for expanding sales are the total asset turnover ratio and the return on assets ratio. The total asset turnover ratio measures how efficiently a company is using its assets to generate revenue, while the return on assets ratio measures how much profit a company generates with the assets it has. By analyzing these two ratios, management can determine whether the company is generating enough revenue and profit to justify expanding sales. Critical Thinking: Definitions, Terms, Concepts and Ideas 5 Explain the limitations of ratio analysis: Ratio analysis is a popular tool for analyzing financial statements, but it has several limitations. Historical Information: Ratio analysis is based on past financial data, which may not accurately represent future performance. External Factors: Ratios do not consider external factors such as a worldwide recession, which can significantly impact a company’s financial performance. Qualitative Aspects: Ratios only consider quantitative aspects and ignore qualitative aspects such as product quality, customer service, and employee morale. Manipulation: Financial information can be manipulated to make the figures used for ratios more attractive. Limited Scope: Ratios only show comparison or trend, and management must take actions afterward based on an analysis of ratios. Narrow Focus: Ratios deal mainly in numbers and do not address issues like product quality, customer service, and employee morale. Critical Thinking: Definitions, Terms, Concepts and Ideas 6 Discuss what type of users will benefit from ratio analysis within the company and explain how they will benefit. Management: Ratio analysis can help management understand how well the company uses its assets and resources to generate sales or use up inventory. It can also help identify early warning signs of declining performance, assess the operational efficiency of the company, and locate the weak spots of the business. By using ratio analysis, management can make informed decisions about the company’s future direction and strategy. Shareholders: Ratio analysis can provide valuable insights to shareholders about the company’s performance, profitability, liquidity, solvency, and associated risks with the help of coverage ratios. Shareholders can use this information to evaluate their investment in the company and make informed decisions about buying or selling shares. Creditors: Ratio analysis can help creditors assess the creditworthiness of the company and its ability to repay loans. They can use ratios such as the current ratio, quick ratio, and debt-to-equity ratio to evaluate the company’s liquidity, solvency, and leverage. Board of Directors: Ratio analysis can help the board of directors monitor the company’s performance over time, while comparing it to other companies within the same industry or sector. This can help them identify areas where the company is underperforming and take corrective action. Module 02: Financial Statement Analysis Capital expenditure decision using NPV and IRR. The CFO of GolfPro Center is considering purchasing an automated fairway weed control machine, but is uncertain as to whether it is a favorable expenditure decision. The CFO has asked you, the accounting manager, to evaluate the capital expenditure item and report the results. Since the cash flows don’t occur in the same periods and because a dollar today is worth more than a dollar tomorrow, you will need to take into account the time value of money by using the net present value (NPV) approach and/or the internal rate of return (IRR) approach. The company estimated the equipment will last 5 years. Each year it will save the company $2000 in wasted spraying conditions. It will also reduce labor costs by $20,000 a year. It is estimated that the equipment will require $1,000 maintenance costs per year. The equipment costs $70,000 and it is expected to have a residual or salvage value of $5000 at the end of 5 years. Top management has determined the required rate of return is 12%. Should the company invest in the new equipment? Report results and decision determination to owner. 1 Net Present Value Approach Time Period 0 Cash Flow Purchase Price $ (70,000) Labor Savings Paint Savings Maintenance Residual Value Total Cash Flow $ (70,000) PV Factor Total Cash Flow Required Rate of Return 2 3 4 5 20,000 2,000 (1,000) 20,000 2,000 (1,000) 20,000 2,000 (1,000) 20,000 2,000 (1,000) 21,000 21,000 21,000 21,000 20,000 2,000 (1,000) 5,000 26,000 0.12 NPV IRR 2 1 NPV Using Excel (show formula): IRR Using Excel (show formula): Critical Thinking: Problem Solving Problem Solving: What is the result consider the NPV? Should the project be undertaken? Critical Thinking: Problem Solving 3 Problem Solving: What is the result considering both NPV and IRR? Should the project move forward? Creatively solve the problem by determining the best method for the situation. Critical Thinking: Clarity and Precision 4 Summarize the comparison of net present value and internal rate of return methods. In your response, be sure to use a complex idea expressed in a short, declarative response. Critical Thinking: Definitions, Terms, Concepts and Ideas 5 The CFO asks, how do the net present value and internal rate of return methods differ in their approach to evaluating this investment decision? How do you respond to this question? Critical Thinking: Definitions, Terms, Concepts and Ideas 6 The CFO asks, why is it important to take into account the time value of money when making capital budgeting decisions? Information Literacy: Evaluating Information 7 Research an Accounting Issue: Decide which would be a better option for the company: should the company acquire a lease option as opposed to purchase option? Research lease options versus purchase options for the company. In your response discuss how the lease option would be accounted for financially. Analyze and select which is a better decision for the company, the lease option or purchase option? Module 02: Financial Statement Analysis Communication: Purpose and Meaning and Digital Fluency: Creation of Digital Files Prepare an analysis report for the capital expenditure decision. Once completed, publish the created file online for a board audience using open source repositories with sharing and viewing capabilities. Module 03: Full Disclosure in Financial Reporting and Management Responsibility Financial Disclosure: Notes and MD&A Financial Notes Financial statements are included in the annual report which is presented to its shareholders. In this section, prepare the financial statement notes as indicated. Critical Thinking: Creativity and Innovation 1 Prepare the Financial Statements Notes: Note 1. The Company Critical Thinking: Creativity and Innovation 2 Prepare the Financial Statements Notes: Note 1. Revenue Recognition Critical Thinking: Creativity and Innovation 3 Prepare the Financial Statements Notes: Note 2. Inventories Critical Thinking: Creativity and Innovation 4 Prepare the Financial Statements Notes: In this section create a financial statement of your choice. You may create and assess any category of the financial statements accordingly. Management’s Discussion and Analysis In addition to the financial statements and disclosure notes, each annual report of a public company requires a lengthy discussion and analysis provided by the company’s management. In this section review the views on significant events, trends, and uncertainties which pertain to GolfPro Center’s operations, liquidity and capital resources. 5 Prepare the Management Discussion & Analysis: Accounting Policy and Internal Control Critical Thinking: Creativity and Innovation 6 Prepare the Management Discussion & Analysis: Management’s Responsibility Critical Thinking: Creativity and Innovation 7 Prepare the Management Discussion & Analysis: Internal Control Critical Thinking: Creativity and Innovation 8 Prepare the Management Discussion and Analysis: In this section create a component of the MD&A of your choice. You may create and assess any category of the financial statements accordingly. Critical Thinking: Creativity and Innovation 9 The CFO has asked you to explain the major advantages of notes to the financial statements and to identify the items are typically reported in the notes. Also explain what the full disclosure principle means in accounting. Critical Thinking: Definition, Terms, Concepts and Ideas 10 Explain what the MD&A section provides and the viewpoint it contains. Critical Thinking: Definition, Terms, Concepts and Ideas 11 Explain what the note disclosures offers to users. The note disclosures offers additional information either to explain the information presented in the financial statements or to provide information note included in the financial statements. Communication: Audience and Delivery Explain to the CEO and CFO the responsibility of company management and the independent auditors in the 12 accounting communication process. Use audience specific and influential tones to engage others on points made. Module 03: Full Disclosure in Financial Reporting and Management Responsibility Management Responsibility Demonstrate leadership characteristics of the managerial accounting profession. The IMA’s Statement of Ethical Professional Practice was designed to help finance professionals “to link ethical perspectives directly to their ongoing workplace responsibilities.” Unfortunately, some individuals may choose to act unethically and perhaps cause great harm to other individuals and organizations. Review the Institute of Management Accountants (IMA) website and read the IMA’s Statement of Ethical Professional Practice. In each of the following examples, determine which of the four standards of ethical conduct has been violated. Some examples may violate more than one standard. You are the accounting manager for GolfPro Center. Betty Jones is a new accountant you have hired and reports directly to you. The company is now selling third party golf carts at cost plus 25% and charges a fee of $250 per delivery and time spent on each engagement. Recently the CFO asked Betty directly to charge the delivery fee to the Peachtree Golf Course account when instead it was actually delivered to the Pelican Hills Golf Course account. The rationale: “Look, Pelican Hills Golf Course is a struggling start-up course and they can barely afford to buy our golf carts. We made a mistake at delivery and did not deliver the right amount at the estimate due to some unforeseen problems, and they’ll balk if we charge them for all of our time. Peachtree Golf Course, on the other hand, is a highly profitable course, and we’re providing services that are going to make them even more profitable. They’ll have no problem with their bill.” Digital Fluency: Evaluation of Digital Resources & Information Literacy: Evaluating Information, Ethical Use of Information, and Creation of New Information/Participation in Field According to the IMA’s ethical standards, what do you suggest that would help Betty resolve this issue? In your answer, cite specific 1 language in the IMA code. Which IMA principle(s) was/were violated? Assess the reliability/credibility of the material and cite your sources in APA-style, including in-text citations and a reference list at the bottom of this box. Information Literacy: Inquiry Development Let’s say you found out that in a the CFO’s prior workplace he had lied to federal investigators saying that there was a standing order to sell the stock if the share price fell below a certain average. In return for lying the CFO reportedly received money, airplane ticked 2 and extra vacation money. Which IMA standard(s) was violated? In your response, analyze the topic based on the scope, depth and the assignment. Information Literacy: Inquiry Development Let’s say you found out that a golf shop competitor’s CFO was just charged with recording operating expense as capital assets. 3 Depreciating these assets over time inflated the company’s profits and hid the expenses from the company’s auditors. Which IMA standard(s) was violated? In your response, analyze the topic based on the scope, depth and the assignment. Critical Thinking: Self Reflection and Logical Thought 4 Discuss the importance of ethical behavior in managerial accounting. In your response, demonstrate self awareness with an ability to question your own ideas and belief systems. Module 04: Management Decision Access cost-volume-profit techniques to determine optimal managerial decision. Examine the effects of changes in sales price, cost and volume. The company has developed a target budget for selling 50,000 units in the upcoming year. The estimated budget is to sell 40,000 golf shirts and 10,000 pairs of shoes. Therefore the sales mix is 4 golf shirts for every pair of golf shoes sold. No fixed expenses are assigned to either golf shirts or golf shoes. As long as the company keeps selling golf shirts and shoes, the fixed expenses will not change therefore they are deducted in total rather than allocated to the individual product lines. The forecasted income statement is listed below. GolfPro Center Forecasted Income Statement For the year ended 2017 Sales Cost of goods sold Sales commission Variable expenses Contribution margin Selling and marketing Administrative expense Fixed expense Operating income Sales Price Cost of goods sold Sales Commission Total Variable expenses Contribution Margin Total $800,000 592,000 48,000 640,000 160,000 Golf Shirts Per Unit $20.00 14.80 1.20 16.00 4.00 Golf Shirts $20.00 14.80 1.20 16.00 $4.00 Golf Shoes $45.00 36.00 2.70 38.70 $6.30 Percentage 100% 74% 6% 80% 20% Golf Shoes Total Per Unit Percentage $450,000 $45.00 100% 360,000 36.00 80% 27,000 2.70 6% 387,000 38.70 86% 63,000 6.30 14% Total Company Total Percentage $1,250,000 100% 952,000 76.16% 75,000 6% 1,027,000 82.16% 223,000 17.84% 125,000 53,400 178,400 446,000 Use the data tables above to solve Case Study problems: The CFO is in the process of making a business decision based on revenue generating concepts to increase sales for next year. He has asked for your assistance in examining the effects of financial changes in the sales mix. He needs assistance using cost-volume-profit techniques. 1 His first question to you: what is the company’s CM ratio and variable expense ratio for golf shirts and golf shoes? CM ratio = unit CM/unit selling price Golf Shirts Golf Shoes Variable Expense Ratio = variable expense/selling price Golf Shirts Golf Shoes 2 His second question, is what is the current break even point? (use the equation method) 3 His third question, what would happen if we increase sales by $400,000 next year. Let’s assume the cost behavior pattern remains unchanged, by how much will the company’s net income increase? (use the CM ratio to compute answer) Increase in Sales CM ratio Expected increase in CM 4 His fifth question is how many golf shirts and pairs of shoes are needed to be sold to earn $66,900 in operating income? Based on the information provided to the CFO, he has now developed a new proposal to increase sales for next year. The CFO is determined to increase sales therefore he has set up a commission of 6% to the sales staff team. Consider the golf shop’s original sales mix of 40,000 golf shirts and 10,000 shoes. In an effort to stimulate sales, the golf shop sales incentive will be use the target market of youth golf teams. This move has increased the sales commission paid on each golf shirt to 12.3%. The CFO believes that this move will generate additional sales of 10,000 golf shirts, with no effect on shoes sales. 5 How will this move alter the golf shops sales mix? Sales price Cost of goods sold Sales commission Total Variable expenses Contribution margin 6 Calculate and explain how will it affect the breakeven point? Information Literacy: Creation of New Information/Participation in Field 7 Select and organize expert information and weigh the information against your own emerging research. Do you think the company should accept the CFO’s proposal to increase sales commission? By lowering the contribution margin per unit of golf shirts and shifting a greater percentage of sales to those golf shirts, more golf shirts and more shoes will have to be sold in order to break even. Is this change a good move? Include in your analysis, what happens to the breakeven point if the sales mix changes. Original contribution margin: Golf shirts New contribution margin: Golf shirts Reduction in contribution margin 8 If the sales proposal should be accepted and if sales remain at current level, what will the income or loss from operations be for the budgeted year. 9 Identify basic cost behavior patterns and explain how changes in activity level affect the total cost and unit cost. Cost behavior Variable Fixed Mixed As Activity Increases Total Cost Cost per Unit As Activity Decreases Total Cost Cost per Unit Module 04: Management Decision Digital Fluency: Creation of Digital Files The CFO is anxious to increase the company’s profit and has asked you to prepare an analysis and summary of your findings. Prepare an analysis report to support the business decision. You may use graphs and other statistical data to present findings. Apply advanced formatting features to present and produce a professional document. Create the information to present to users in a visually interesting and organized manner. Module 05: Professional Business Ethics and Internal Control Select an appropriate conclusion to an ethical dilemma. You have now worked for GolfPro Center for a few years and along your journey have obtained your CPA license. Now that you have become a CPA you have taken on extra work on the side by performing tax services to some small business clients. Desert Willow Golf Course is one of your new small business accounts and you are obligated to compete their corporate tax return by April 15th. Ironically, Desert Willow Golf Course, is also a customer of GolfPro Center as they purchase inventory to stock their pro-shop at the golf course. Desert Willow Golf Course has recently fallen more than 90 days past due on paying their bills to GolfPro Center. In your position at GolfPro Center you have been assigned to review and perform an internal audit of Desert Willow Golf Course’s customer account. In addition, you are also responsible for preparing and estimating the Allowance for Doubtful Accounts for GolfPro Center. When preparing the report, you have left Desert Willow Golf Course off of the aging report. The CFO has asked you for your justification for not including Desert Willow Golf Course on the 90+ aging report. Your reply is, it seems there are some audit related questions about the collectible amount for Desert Willow Golf Course; therefore you have come up with an explanation for not including them in the estimated allowance report which satisfies the CFO. GolfPro Center is now growing and has decided to expand by opening a new store in Southern California. Since you have now obtained your CPA license the company has offered you a nice promotion and raise with GolfPro Center. You will have to transfer to a new location to begin gathering a team to start the finance department at the new store in Southern California. You have accepted the promotion and leave immediately. In the mean time you have decided to quit doing accounting on the side which includes your business with Desert Willow Golf Course. In moving, you have not completed the corporate tax return Form 1120 for Desert Willow Golf Course which should be filed with the IRS by a specific date. You also failed to inform Desert Willow Golf Course of your new relocation. In trying to locate you, Desert Willow Golf Course contacts GolfPro Center and discloses your side work business. Ethics and Professionalism: Ethical and Situational Awareness 1 Determine the best outcome for this situation: Do you think it is ethically appropriate to provide tax services to Desert Willow Golf Course, a customer of GolfPro Center, while at the same time being employed by GolfPro Center? Evaluate the impact this decision has on laws and on your own core of beliefs and personal ethics. Information Literacy: Ethical Use of Information 2 According to the Case Study, have you violated any of your ethical responsibilities to GolfPro Center and to Desert Willow Golf Course? In your response be specific and reference the AICPA Code of Professional Conduct in answering the question. Provide attribution and integrate citations for all resource types. Provide APA style in-text citations and a reference entry for the AICPA Code. Ethics and Professionalism: Integrity 3 What if your new boss at your new job in Southern California just found out about your dual role as internal auditor and tax accountant for the corporate office of GolfPro Center. What would you expect the new boss should do? Determine the level responsibility your new boss has on the impact this decision will make for the overall department. Module 05: Professional Business Ethics and Internal Control Internal Control Ethics and Professionalism: Attitudes 1 Explain to the department what internal control is and why the company should establish an internal control system. Ethics and Professionalism: Attitudes 2 Currently John works as the accountant for GolfPro Center. He opens the mail for the company everyday and sets aside all of the incoming checks for the company. He lists all incoming checks on a spreadsheet which includes the name of the customer and the check amount. He then records all of the checks into the accounting system by applying the payment to the customers account. Next he prepares the checks for the bank deposit. He completes the bank deposit slip and attaches all checks. He then gives the incoming check spreadsheet, checks and bank deposit to you the review and sign off on. After your approval, he then hand carries the checks to the bank each day to deposit. Define cash receipts and discuss the basic controls for cash receipts. Also, explain directly how the company could improve its internal control procedure for handling cash receipts. Include in your response the demonstration of the importance of understanding the segregation of duties and how additional proper documentation could be used to improve the final approval process. Ethics and Professionalism: Attitudes 3 4 John approves all requests for payment out of the $200 fund, which is replenished at the end of each month. At the end of each month, John submits a list of all accounts and amounts to be charged and a check is written to him for the total amount. John is the only person ever to tally the fund. Explain the internal control weakness and describe how internal controls can be improved upon. What questions would you ask to find out additional information regarding this internal control situation? Ethics and Professionalism: Attitudes All of the company’s cash disbursements are made by check. Each check must be supported by an approved voucher, which is in turn supported by the appropriate invoice and, for purchases, a receiving document. After reviewing the supporting documentation, you approve the voucher. John prepares the checks for the CFO’s signature. John also maintains the company’s check register (the cash disbursements journal) and reconciles the bank account at the end of each month. Diversity and Teamwork: Skills 5 GolfPro Center has just completed the annual audit. The auditors presented a list of control deficiencies to the CFO. The CFO has asked you to meet with your team to decide on a improvement plan. Using the above examples as control evidences, explain how you would gather your department team to discuss how to improve on these items. Include the following details in your response: Discuss the team members and resources you would gather to discuss this matter. Advocate respect, value and appreciation for individuals working within the finance department, explain the communication skills needed to approach the team. Describe the professional skills needed to accomplish the task. Diversity and Teamwork: Skills 6 Continuing along the results of the annual audit, explain how an audit enhances the quality for financial statement reporting and managements report on internal controls. Include in your repose if an audit actually guarantee a fair presentation of a company’s financial statements. Module 05: Professional Business Ethics and Internal Control Diversity of Accounting Issues Diversity and Teamwork: Knowledge Research the FASB Website. 1 2 Go to the website of the Financial Accountant Standards Board (http://www.fasb.org). Identify the most recently issued financial reporting standard and summarize briefly its principal provisions. Also search under Project Activities to identify the reporting issue with the most recent update. Describe the issue and the nature of the action taken by the FASB. In your response, demonstrate a profound appreciation of the meaning of diversity in accounting standards, explain the need for diverse perspectives. Diversity and Teamwork: Knowledge Research the IASB Website Go to the website of the International Accounting Standards Board (http://www.isab.org). Search for the International Financial Reporting Standards (IFRS) summaries. Identify the most recently issue international financial reporting standard and summarize briefly its principle provisions. In your response, demonstrate a profound appreciation of the meaning of diversity in accounting standards, explain the need for diverse perspectives. Diversity and Teamwork: Attitudes 3 Critique and criticize bias regarding accounting practice issues in diversity by explaining the reasons for differences in accounting practice’s across countries. Diversity and Teamwork: Skills 4 International Financial Reporting Standards are gaining support around the globe. In 2007, the SEC eliminated the requirement for foreign companies that issue stock in the United States to include in their financial statements a reconciliation of IFRS to U.S. GAAP. There also is serious discussion of allowing U.S. companies to choose whether to prepare their financial statements according to U.S. GAAP or IFRS. Do you think U.S. companies should be allowed the choice of reporting under either U.S. GAAP or IFRS? Provide arguments both for and against this idea. Interpret intercultural experience from multiple perspectives and worldviews.
| Module 02: Financial Statement Analysis | |||||||||||||
| Capital expenditure decision using NPV and IRR. | |||||||||||||
| The CFO of GolfPro Center is considering purchasing an automated fairway weed control machine, but is uncertain as to whether it is a favorable expenditure decision. The CFO has asked you, the accounting manager, to evaluate the capital expenditure item and report the results. Since the cash flows don’t occur in the same periods and because a dollar today is worth more than a dollar tomorrow, you will need to take into account the time value of money by using the net present value (NPV) approach and/or the internal rate of return (IRR) approach. The company estimated the equipment will last 5 years. Each year it will save the company $2000 in wasted spraying conditions. It will also reduce labor costs by $20,000 a year. It is estimated that the equipment will require $1,000 maintenance costs per year. The equipment costs $70,000 and it is expected to have a residual or salvage value of $5000 at the end of 5 years. Top management has determined the required rate of return is 12%. Should the company invest in the new equipment? Report results and decision determination to owner. | |||||||||||||
| 1 | Net Present Value Approach | ||||||||||||
| Time Period | 0 | 1 | 2 | 3 | 4 | 5 | |||||||
| Cash Flow | |||||||||||||
| Purchase Price | $ (70,000) | ||||||||||||
| Labor Savings | 20,000 | 20,000 | 20,000 | 20,000 | 20,000 | ||||||||
| Paint Savings | 2,000 | 2,000 | 2,000 | 2,000 | 2,000 | ||||||||
| Maintenance | (1,000) | (1,000) | (1,000) | (1,000) | (1,000) | ||||||||
| Residual Value | 5,000 | ||||||||||||
| Total Cash Flow | $ (70,000) | 21,000 | 21,000 | 21,000 | 21,000 | 26,000 | |||||||
| PV Factor | |||||||||||||
| Total Cash Flow | |||||||||||||
| Required Rate of Return | 0.12 | ||||||||||||
| NPV | NPV Using Excel (show formula): | ||||||||||||
| IRR | IRR Using Excel (show formula): | ||||||||||||
| Critical Thinking: Problem Solving | |||||||||||||
| 2 | Problem Solving: What is the result consider the NPV? Should the project be undertaken? | ||||||||||||
| Critical Thinking: Problem Solving | |||||||||||||
| 3 | Problem Solving: What is the result considering both NPV and IRR? Should the project move forward? Creatively solve the problem by determining the best method for the situation. | ||||||||||||
| Critical Thinking: Clarity and Precision | |||||||||||||
| 4 | Summarize the comparison of net present value and internal rate of return methods. In your response, be sure to use a complex idea expressed in a short, declarative response. | ||||||||||||
| Critical Thinking: Definitions, Terms, Concepts and Ideas | |||||||||||||
| 5 | The CFO asks, how do the net present value and internal rate of return methods differ in their approach to evaluating this investment decision? How do you respond to this question? | ||||||||||||
| Critical Thinking: Definitions, Terms, Concepts and Ideas | |||||||||||||
| 6 | The CFO asks, why is it important to take into account the time value of money when making capital budgeting decisions? | ||||||||||||
| Information Literacy: Evaluating Information | |||||||||||||
| 7 | Research an Accounting Issue: Decide which would be a better option for the company: should the company acquire a lease option as opposed to purchase option? Research lease options versus purchase options for the company. In your response discuss how the lease option would be accounted for financially. Analyze and select which is a better decision for the company, the lease option or purchase option? | ||||||||||||
