Management Brief Analysis Milestone Two PDF

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Milestone Two Management Analysis Brief for Peyton Approved
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Betty Ann Leger ACC308 Milestone Two Management Analysis Brief November 22, 2021

Pro Forma Financial Statements Along with the attached financial statements for the fiscal years of 2016/2017, you will also see the Pro Forma documents for the upcoming year 2018 attached to help potentially predict the ability of the company to meet its future growth. "Pro forma, a Latin term that means "for the sake of form" or "as a matter of form," is a method of calculating financial results using certain projections or presumptions." [CITATION Tuo21 \l 1033 ] We took the income statement numbers and the balance sheet number from 2017, and we increased them by 80% to reflect the potential we see for the company financially in the upcoming year. A benefit of using the pro forma statements as a prediction tool is that the business owner controls the information used to make these predictions. "Essentially, a pro forma financial statement can exclude anything a company believes obscures the accuracy of its financial outlook and can be a useful piece of information to help assess a company's future prospects." [ CITATION Tuo21 \l 1033 ] The pro forma financial statement gives Peyton Approved the ability to assess its future prospects, but it also allows them to calculate for expenses that they are not used to incurring with the growth/expansion they are experiencing. For example, with the expansion, they will have to hire three new employees, requiring that they pay increased wages in the amount of $25,000 each. That, in turn, increases their wage expense for the year from $10,670.72, in 2017,

to a projected amount of $85,670.72 in 2018 (Calculations: (2017)$10,670.72 + ($25,000 * 3)=$85,670.72). By using the pro forma statements, Peyton Approved can account for the increase, allowing them to plan to cover this increase in wages expenses properly. Another area that we can look at in the pro forma financial statements to reflect where using these calculations is beneficial for the company at predicting economic outcomes would be prepaid rent. Peyton Approved is looking to lease commercial space; the cost of leasing the space will be $1,500.00 monthly or; $18,000.00 yearly. This added expense included in the pro forma financial statement allows the company to avoid potential areas that could be problematic with the expansion. "pro forma helps to avoid debt by considering all possible outcomes early on, saving your business from an unexpected crisis that could leave you frantically searching for immediate loans to continue functioning."

Inventory Costing, Contingent Liabilities, and Revenue Recognition The company uses the LIFO (Last in First out) method for tracking the baking and merchandise inventory, in conjunction with the periodic method. "Under LIFO, the costs of the most recent products purchased (or produced) are the first to be expensed. Using LIFO typically lowers net income but is tax advantageous when prices are rising."[CITATION Smi21 \l 1033 ] The Periodic method is a form of inventory valuation where the inventory account is updated at the end of an accounting period rather than after every sale and purchase. The method allows a business to track its beginning inventory and ending inventory within an accounting period." [ CITATION Ken21 \l 1033 ] There are advantages and disadvantages to both. Advantage of LIFO (Last in First out):

"When evaluating inventory sales, LIFO assumes that the most recently acquired inventory is the inventory sold. The biggest benefit of LIFO is a tax advantage. During times of inflation, LIFO results in a higher cost of goods sold and a lower balance of remaining inventory. A higher cost of goods sold means lower net income, which results in a smaller tax liability."[CITATION Smi21 \l 1033 ] Disadvantages of LIFO (Last in First out) Method: "LIFO is not a good indicator of ending inventory value because it may understate the value of inventory. LIFO results in lower net income (and taxes) because COGS is higher. However, there are fewer inventory write-downs under LIFO during inflation."[CITATION Smi21 \l 1033 ] Advantage of the Periodic Method: "There is no need to have separate accounting for raw materials, work in progress, and finished goods inventory. All that is recorded are purchases. Only when the accounting period ends, and a physical inventory count is made, does the value of purchases need to be known. In some respects this simplifies the accounting system and helps to reduce inventory tracking costs."[ CITATION Per \l 1033 ] Disadvantage of the Period Method: "While the periodic inventory system works well for some types of businesses, in particular those with high sales volume, it does have some disadvantages. These include not knowing stock levels, a lack of detail, the potential for a loss of revenue, and not collecting useful sales information."[ CITATION Per \l 1033 ] Estimating inventory at 80% of what the numbers were for the year 2017 allows Peyton Approved to come up with a budget that will cover all of their increasing expenses with the expansion.

When looking at contingent liabilities, we see that Peyton Approved is carrying a longterm loan in the amount of $15,000 on June 1, 2016. The terms of this loan are a five-year loan at a 7.5% annual rate, interest-only until the due date. Our final area for consideration is revenue recognition; per GAAP, revenue is recognized as a specific principle. "GAAP (generally accepted accounting principles) require that revenues are recognized according to the revenue recognition principle, a feature of accrual accounting. This means that revenue is recognized on the income statement in the period when realized and earned—not necessarily when cash is received. "[ CITATION Fer211 \l 1033 ] What this means for Peyton Approved is that if they sell large amounts of their products to retailers on account, they cannot account for this revenue until the products are sold, and they have received the payment from the retailers. This, in turn, prevents them from fully closing out Accounts Receivable until the balance is paid in full.

Issues in Interpretations As with any financial predictions, many things cannot realistically be accounted for. The pro forma financial statements are not an exact science. They focus on the "What-ifs" in business, not the "yes this is going to happen because it has in the past." This could lead to issues down the road. Someone could have transposed a number or miscalculated an interest rate. The company could also be way out in left field with their predictions, and they may not be as successful as they are predicting. Any error on any of these documents, no matter how insignificant, could mean the success or failure of the company and whether they can entice investors and shareholders to make the jump and follow them into expansion.

Before going forward, Peyton Approved should evaluate the pros and cons of each scenario presented and double(triple) check everything to ensure they have not missed or miscalculated anything before moving onto an expansion.

Works Cited Fernando, J. (2021, October 25). Generally accepted accounting principles (GAAP). Retrieved from Investopedia: https://www.investopedia.com/terms/g/gaap.asp. Kenton, W. (2021, May 19). Periodic inventory: What you should know. Retrieved from Investopedia. : https://www.investopedia.com/terms/p/periodicinventory.asp. Periodic Inventory System. . (n.d.). Retrieved from https://www.graphicproducts.com/articles/periodic-inventory-system. : https://www.graphicproducts.com/articles/periodic-inventory-system. The Pros & Cons of Lifo & Fifo. (2020, October 27). Retrieved from Small Business Chron.com.: https://smallbusiness.chron.com/pros-cons-lifo-fifo-76596.html. Tuovila, A. (2021, March 30). Pro Forma Definition. Retrieved from Investopedia.: https://www.investopedia.com/terms/p/proforma.asp...