ACC 308 Final Project Management Analysis Brief PDF

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Alyssa Stein Final Project ACC 308 4/24/21 Final Project Notes to the Financial Statements: After purchasing new equipment for $15,000 using a long-term note, with no residual value, with a given seven-year life, using the straight-line depreciation method brings the total depreciation to $2,142.86 for the year. Inventory is expected to be up to 80% of the current store for 2018 with a value of $687.82 when in 2017 inventory was valued at $859.77. Supplies in 2017 cost $3,000.46, which results in a potential 80% of that total for 2018 which comes out to be $2,400.37. Long Term Debt Notes: Peyton Approved should consider using some of their working capital to reduce their long-term debt or obligations. By doing this they would be able to effectively increase their value of money. Long-term debt can be beneficial to a new location grow as it allows for expansion without having to have all the money immediately giving them some leeway on obligations to give the company time to start generating enough revenue to be able to cover any long-term expenses as well as individual location expenses.

Carefully evaluating the needs for the new location constantly with the need for longterm debt will help keep the precise balance of assets to liabilities and will be the support and growth of the location while maintaining its debts. Peyton Approved is looking to open a second location during the fiscal year and to do that the company needs to look at their financial health using their ratio analyses. Using the already calculated ratios from 2016-2017 these will be used to compare past results and potential future results if the company keeps following the same trend, as well as comparing it to their competitors’ companies and they are growing or falling in their industry. Ratio Analysis

2017

2016

Current Ratio (working capital) Quick Ratio

5.79 4.89

5.19 4.60

A/R Turnover

5.92

5.54

Inventory Turnover

7.67

8.81

Gross Margin

68%

66%

Return on Sales

54%

53%

Return on Equity

125%

161%

Return on Assets

101%

109%

When we first examine the financial health of the company, we see that the gross margin is up by 2% from 2016. If the gross margin continues to rise this will allow Peyton approved to have a greater profit intake. Even though the cost of goods is up by 2% they are still making more. This is supported by the company’s Return on Sales percentage. We also see an increase here indicating that the company is efficiently generating profit from its revenues.

We should also be encouraged by the slight increase of the A/R turnover ratio. It might not be a huge increase, but it is significant even if its just a few days difference. In 2016 the numbers indicated about 65 days and now in 2017 the numbers indicate approximately 61 days give or take. The stronger the collections rates become the more increase to the company’s cash flow they will receive. Now if this turnover were to suffer and drop, this would impact the ability to be able to repay their debts. But according to the trend that is happening these numbers are encouraging that they stay on the right path. An area of concern is the inventory ratio, and they had a significant decrease in 2017 compared to 2016 from 8.81 to 7.67 which is considered a huge decrease. If you were looking at the lower number a possible thought could be that some of the company’s products are in low demand and not as popular even though their revenue numbers do not show this being the issue, so the company will need to see if they are ordering to much of one item versus another using the production and sales reports. Doing so will be critical if they are able to successfully open a second store. This being said, Peyton Approved should consider using some of their working capital to reduce their long-term debt or obligations. By doing this they would be able to effectively increase their value of money. “The time value of money is made up of three specifications: compensation for delayed consumption, compensation for expected inflation and compensation for risk” (Wahlen, Jones & Pagach, 2017). In their case some of their long-term responsibilities show that they are paying more in the above-mentioned specifications to the lender, all in the shape of interest. Interest rates increase the potential value of money for the future because the people lending the money get an increase in profits as a result.

With these results to me the company seems to be in good standing and in a good spot to be able to open a new store next fiscal year and have it be successful. The rise in profits is a good thing even though there might be inventory problems as well as the cost of goods slightly going up but if they are able to fix the inventory turnover problem, they will be on track to keep increasing their profits. They could also potentially try to look into cheaper (still same quality or high quality) materials from off brand shops or third-party retailers which could lower the cost of their goods and bring their profits up even more so than before. I believe Peyton Approved is ready to open a second location. “Pro forma financial statements can help you predict things like net income and gross profit in the future. Using these financial statements, you can plan for the future and lower your risk, as well as attract investors or get approved for financing.” (Guillory, et al., 2020). Standard accounting statements like the balance sheet look at historical financial information, Pro Forma lets you predict potential future income through various types of accounting statements. Inventory costing means a new business will have to decide on which method of inventory costing it will want to use. There are four methods of costing inventory items. They are FIFO (first in first out), LIFO (last in first out), weighted average and specific identification. A company must decide on which method of inventory to use keeping in mind its business and economic scenario. If prices are rising, then they should use the LIFO method because it will lead to lower taxes. This is because its cost of goods sold will consist of the most recent inventory that is priced higher due to the rising prices. Contingent liabilities are potential liabilities that can arise depending on the outcome of a potential event that remains uncertain. A new business will have to determine if its contingent

liabilities are probable, and if its amount can be estimated or determined if it’s possible but not probable. If the contingent liability is both possible and probable and the amount can be estimated, then the new business will have to record the amount with a new journal entry. However, if the contingent liability is only possible and not probable then a new business will just have to submit a disclosure. In cases where contingent liabilities are isolated then no journal entry or disclosure are required. As per the GAAP (generally accepted accounting principles) revenue should be recognized on the occurrence of a crucial event and when the amount of revenue is significant. A new business should ensure that it recognizes revenue when it is attained and earned, and not daily or when it is received. A new business may follow an accrual basis of accounting which is when revenue is recorded only when the revenue generation process is completed and revenue has been earned but not necessarily if they have received it yet, or if the follow a cash basis of accounting which means the revenue is recorded only when cash payments have officially be received by the new business. The accounting of a company should represent the true and fair state of any actual or potential financial affairs that arise. Regarding this, the company must understand and follow all relevant regulations and ethical reporting is very important. It is said that we must do what is morally correct. For example, the golden rule. Treat others how you want to be treated. For example, if the company defaulted in payment to vendors. A late penalty was incurred. This was promptly and accurately recorded in the book and the variance in expenses will be explained to investors. Another

example should there be a change in regulations, like electricity, it was billed to our organization at the commercial rate which was much higher than the industrial rate which was what it should have been and since the bills were not received correctly, we now must add a note for additional liability that was incurred. We also must do this to disclose this information to our investors.

Works Cited:

Guillory, S. N. (2020, June 30). Pro Forma Financial Statements: Why they are important to your business. Retrieved from https://www.nav.com/blog/pro-forma-financial-statements633649/ Wahlen, J.M., Jones, J.P., & Pagach, D.P. (2017). Intermediate Accounting: Reporting and Analysis (2nd ed.). Boston, MA: Cengage Learning....