CASE STUDY

Case Study



Table of Contents

Accounting Analysis3

Part 13

Q2: T Accounts3

Q5 Income Statement and Balance Sheet6

Assumptions9

Assumptions Made9

Part 2 Balance Sheet Company A210

Vertical Analysis of Balance Sheet of Company A211

Income Statement Company A212

Vertical Analysis of Income Statement (Company A2)12

Cash Flow of Company A213

Vertical Analysis of Cash Flow of Company A214

Income Statement of Company B215

Vertical Analysis of Income Statement of Company B216

Cash Flow Statement of Company B217

Vertical Analysis of Cash Flow of Company B218

Balance Sheet and Vertical Analysis of Company B219

Horizontal Analysis21

References24

Accounting Analysis

Part 1

Q2: T Accounts

Cash

4/1/2006 Capital 60000

4/1/2006 Truck 2000

4/1/2006 Sales 340000

4/1/2006 Display Equip 6000

 

4/1/2006 Rototiller 400

 

4/1/2006 Sundry 3600

 

4/1/2006 Stock 60000

 

4/1/2006 Advertisement 20000

 

4/1/2006 Rent 7200

 

4/1/2006 Utilities 1200

 

4/1/2006 Salaries and Wages 4800

 

4/1/2006 Cash 112000

400000

217200

b/d 182800

Bank

4/1/2006 Long Term Debt 32000

4/1/2006 Long Term Debt 11334

 

4/1/2006 Int Exp 4858

 

16192

 b/d 16192

 

Capital

 

4/1/2006 Cash 60000

Long Term Debt

Bank 11334

4/1/2006 Bank 32000

4/1/2006 Bank 10000

Truck

4/1/2006 L-T Debt 12000

 

Display Equipment

4/1/2006 Cash 6000

 

Rototiller

4/1/2006 Cash 400

 

Sundry

4/1/2006 Cash 3600

 

Sales

4/1/2006 Cash 340000

4/1/2006 Debtor 60000

Debtor

4/1/2006 Cash 60000

 

Purchases

4/1/2006 Cash 60000

4/1/2006 Sales 240000

4/1/2006 Creditor 200000

 

Advertisement

4/1/2006 Cash 20000

 

Rent

4/1/2006 Cash 7200

 

Telephone

4/1/2006 Cash 1200

 

Utility

4/1/2006 Cash 4800

 

Wages and Salary

4/1/2006 Cash 112000

 

Interest Expense

4/1/2006 Bank 4858

 

Creditors

 

4/1/2006 Purchases 200000

Q5 Income Statement and Balance Sheet

Sales Revenue

Sales Revenue

 

 

400,000

Total Sales Revenue

0

0

400,000

Cost of Sales

Opening Stock

0

 

 

Purchases

260,000

 

 

Closing Stock

-20,000

 

 

Total Cost of Sales

0

240,000

Gross Profit

 

0

160,000

Operating Expenses

Sales and Marketing

Advertising

 

20,000

 

Sundry

 

3,600

 

Rent

 

7,200

 

Telephone

 

1,200

 

Utility Expenses

 

4,800

 

Wages and salaries

 

112,000

 

Interest Expense

 

4,858

153,658

Total General and Administrative Expenses

0

 

153,658

Net Profit

 

 

6,342

The Garden Place

 

 

 

Assets

Current assets:

2007

Cash

182,800.00

Inventories

20,000.00

Debtors

60,000.00

Bank 15,808.00

Other

-

Total current assets

278,608.00

Fixed assets:

2007

Truck 12,000.00

Display Equipment

6,000.00

Rototiller 400.00

 

 

Total fixed assets

18,400.00

Other assets:

2007

 

 

Total other assets

-

Total assets

297,008.00

 

 

Liabilities and owner's equity

Current liabilities:

2007

Creditors 200,000.00

Total current liabilities

200,000.00

Long-term liabilities:

2007

Long Term Debt

30,666.00

Total long-term liabilities

30,666.00

Owner's equity:

2007

Investment capital

60,000.00

Retained Earnings

6,342.00

Total owner's equity

66,342.00

Total liabilities and owner's equity

297,008.00

Assumptions

Assumptions Made

Payments, whose accounts were not specifically mentioned, were made through cash

Bank Loans payments and interest payments were made through bank

Truck was considered to be bought on long term debt as it was paid over a three years time span.

Analysis for Part 1

Return on Sales for 2007

(6342/400000)

= 0.0158 or 1.58 %

Total Assets Turnover 2007

(400000/297008)

= 1.347 times

Leverage Ratio 2007

(297008/66342)

= 4.47

The initial return on sales tends to be quite low; however it is important see that which factors are contributing to the diminishing profit margins. The two major expenses in the income statement are of advertisement and the wages & salaries. These two expenses seems to be evident because the company has just initiated and it need a heavy promotion and the initial set up needs a workforce, which has induced the higher wage expenses. Overall it can be said that the firm tends to have better profitability in the future.

Similarly it can be seen that the asset utilization is not very efficient, which can be a reason of the first year of the operations. However the leverage ratio shouldn't have been so high, especially at the starting of the business, because any business, when started is in the ...