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Case Analysis 1 Dog Concierges, LLC: Transaction Analysis and Statement of Cash Flows Preparation

Student Maria Epifanova Lesly JeanLouis Junyi Ouyang Yifan Cui

Student number 01632800 00826331 01597944 01248695

T a ble of C on onte te tents nts

Introduction ............................................................................................................................... 3 Case Analysis .............................................................................................................................. 4 Transaction Analysis ................................................................................................................. 5 Cash Flow Statement Preparation.............................................................................................. 7 Balance Sheet Preparation ........................................................................................................ 8

Conclusion .................................................................................................................................. 9 Appendix .................................................................................................................................. 10

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Introduction The report provides information obtained through transaction analysis and statement of cash flows as well as balance sheet preparation. The paper is based on the case of the company named Dog Concierges, LLC. The company provides dog services, and within first two years of its existence, it has succeeded to reach $650,000 in sales. Jeff Birch, the owner of the company, asked his sister, Jenifer, to assist him with the basic course in accounting. Jenifer teaches him the crash course and gives homework exercises that aim to educate Jeff to recognize various financial transactions as well as to construct financial statements.

This case study is effective to get understanding of accounting fundamentals, financial transactions’ recognition, financial statements ’ preparation and correlation between the se statements. Besides, in order to get a clear picture of business activities, it is important to analyze the specifics of company’s business model.

The report will comment on transactions based on business activities and explore perspectives of these financial movements and their effects on company’s performance in general. These observations do have restrictions since the case did not provide a clear picture of Dog Concierges’ business model.

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Case Analysis The case analysis is divided into three parts as transaction analysis, cash flow statement preparation as well as balance sheet preparation. Each section answers a certain case question, thus: the transaction analysis refers to the exercise 1, the cash flow preparation to the exercise 2, and the balance sheet preparation to the exercise 3 respectively. Each section presents the data used for analysis as well as the analysis itself.

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Transaction Analysis Financial Statement Effects Template Balance Sheet Cash Asset 1

Income Statement

Noncash +

Assets

Contrib. =

Liabilities

+

$15.000

Earned

Capital

+

Net

Capital

Revenues -

$40.000

$40.000

R/E

Sales

Expenses

=

Income

$15.000 Com St

2

3

$55.000

$55.000

Inventory

A/P

$40.000

$40.000

3

-$29.000 Inventory

4

5

6

7

8

R/E

$30.000

$30.000

Cash

N/P

$4.500

-$4.500

Cash

A/R

-$8.000

$8.000

Cash

PPE

-$1.500

-$1.500

Cash

R/E

-$2.500

-$2.500

Cash

A/P

9

-$29.000

$29.000

-$3.500

COGS

-$3.500

PPE,net

$29.000

-$3.500

-$3.500

Depreciation

R/E

Expense 10

$17.500

$17.500

$17.500

Cash

R/E

Sales

10

$17.500

-

-$14.000

-

-$14.000

$14.000 PPE 11

$1.350 Accrued

$14.000

R/E

COGS

-$1.350

-$1.350

R/E

Interest $95.000

+

$12.000

=

$83.850

-$1.350

Interest Expense

+

$15.000

+

5

$8.150

$57.500

-

-$47.850

=

$9.650

107.000,00

=

107.000,00

Table 1: Transaction Adjustments Source: Dog Concierges, LLC: Transaction Analysis and Statement of Cash Flows Preparation , 2009

These fictitious business events only reflect the plausible occurrence of similar activities in Jeff 's company based on the current business model, although they offered him a great insight into the world of financial accounting. He was able to see and understand firsthand the impact of each transaction on the Balance Sheet and the Income Statement in terms of an increase and decrease in the accounts.

A quick look into these events will show a certain expansion in the company. It is expressed by the sale of capital stock which show the business ' ability to attract new investors to support its financing needs. Even though, the business has a strong cash position, it seems that most of these cash inflows were not generated solely by operating activities. The acquisition of raw material depicts that Dog Concierges, LLC might be in the business of manufacturing some of its products for resale. The liabilities accounts increase faster than equity which could be a risk factor in terms of financial leverage for the company. The ability for the business to borrow money in the short term can only showcase not only confidence, but also strong business prospects.

Despite Jeff 's confidence of his understanding of financial accounting, it is important to point out certain flaws in his reporting. Referring to exhibit 3, the classification of miscellaneous expense and its financial impact in the income statement is quite disturbing. This account represents more than three quarter of the total expense in the statement and does not give any indication on what these expenses consist of. It is clear that Jennifer omission of wages payable and wage expense as an event may induce Jeff in error. Is it possible that Jeff includes wage expense in the miscellaneous expense? Only the footnotes could shed light on such mystery.

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Cash Flow Statement Preparation

Cash Flow Statement Net Income

$25,00

Depreciation expense

$45,00

Account Receivales increase

$(10,00)

Inventory increase

$(20,00)

Accounts Payable increase

$50,00

Taxes Payable decrease

$(10,00)

Cash flow from operations

Purchase building

$80,00

$(85,00)

Other ass ets decrease

$20,00

Cash flow from investing

$(65,00)

Payment on long-term debt

$(20,00)

Purchase of common stock

$10,00

Dividends

$(15,00)

Cash flow from financing

$(25,00)

Increase in cash

$(10,00)

Beginning cas h

$110,00

Ending cash

$100,00

Table 2: Cash Flow Preparation Source: Dog Concierges, LLC: Transaction Analysis and Statement of Cash Flows Preparation, 2009

Cash flow from operations which equals to $80 thousands is a good sign, since his daily business operations contributed to positive and comparably high cash flow. He is confident about taking loans because of such a high operating cash flow. Although cash flow from investing is negative, Jeff is investing into building, so he is expanding his business. It is not possible to elaborate on other assets since the further information related to this category is not provided.

Cash flow from financing is also negative, but it shows good activities since the company paid out dividends and it decreased it long-debt debt by $20 thousands, which is a positive side. Besides, investors bought common stock of a company, which means that creditors are confident about the company. 7

Balance Sheet Preparation

Balance Sheet Assets Cash assets

Liabilities and equity $95,00

Tax Payable

Non-cas h as sets Accounts Receivable

$87,00

Inventory

$112,00

Building

$297,00

Other

Accounts Payable

$80,00

Long-term debt

$

37,00 $248,00

Total liabilities

$394,00

Contributed Capital

$126,00

Retained Earnings

$151,00

Total equity

Total Assets

$109,00

$277,00

Total Liabilities and $671,00

Equity

$671,00

Table 3: Balance Sheet Preparation Source: Dog Concierges, LLC: Transaction Analysis and Statement of Cash Flows Preparation , 2009

Based on the information provided (also refer to Appendix), it is considered that the business is going on the right direction since there is an increase in cash, along with the increase in A/R and at the same time increase in A/P, which explains that the business is buying a lot more inventories and having a lot more sales on account when looking at A/R.

The company assumes that the stock is undervalued, and therefore, it has repurchased the stock, which is going to make the company more attractive to potential investors and indicated that the company has enough cash to refinance the buyback. The attractiveness of shares at the same time might increase because of payment of dividends by the company.

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Conclusion Based on the fact presented by the case study, it is important to point out the relevance of the events given to Jeff in order to understand the business environment, the accounts involved, and interaction between the financial statements.

Although the information that was given to Jeff is missing some important and critical aspects of his regular business activities such as recognizing Wages, Administrative and Marketing Expenses. These transactions are essential owning the fact that they reflect the delicate adjustments of accrual accounting. In addition, Jeff should realize that the $100 bet should not be recorded as a business transaction because it is not related to daily business and due to the fact that Dog Concierges, LLC is not a sole proprietorship.

It is important to mention that the statements that Jeff has prepared do show his understanding of basic accounting as his sister intended.

In addition, based on the past two years’ activities, Dog Concierges seems to improve tremendously and is considered to be in a comparably secure financial position. Nevertheless, the management has to pay careful attention when recognizing miscellaneous expense as in order to get understanding what the character of these expenses are and how they affect the financial performance of the company.

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Appendix Preparation of Balance Sheet using the cash flow statement from the past two years.

Balance Sheet 2 yeas earlier Change

BS 1 year earl

BS 2 years earl

$(15,00)

110

$95,00

A/R increase

$(3,00)

$90,00

$87,00

Inventory decrease

$12,00

$100,00

$112,00

A/P increase

$21,00

$130,00

$109,00

T/P increase

$3,00

$40,00

$37,00

$(3,00)

$280,00

$297,00

Other assets increase

$(20,00)

$100,00

$80,00

Payment on l-t debt

$(28,00)

$220,00

$248,00

Purchase of common stock

$(16,00)

$110,00

$126,00

Payment of dividends

$(10,00)

$-

$10,00

Net Income

$39,00

Depreciation expense

$20,00

Cash

Purchase building

Source: Dog Concierges, LLC: Transaction Analysis and Statement of Cash Flows Preparation, 2009

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