Attached is my Milestone 01 and 02 Management Briefs, along with my financial notes. Additionally, I have attached feedback from Milesto

ACC 308 Final Project: Milestone II Part II: Financial Notes

Tim Weaver

Southern New Hampshire University

Financial Notes

References

Bragg, S. (2019). Straight line depreciation. Retrieved April 3, 2022, from https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation

Supply Management: An Overview. (2019). Retrieved April 3 2022, from https://www.investopedia.com/terms/s/supplymanagement.asp

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5-1 Final Project Milestone Two: Management Analysis Brief

Tim Weaver

Intermediate Accounting II

April 8, 2022

Professor Snyder

Running head: Milestone II Management Brief 1

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MANAGEMENT BREIF

It is always good to see a business experience growth each year, and even more exiting when the business makes a decision to expand due to the continued success of the initial location. Therefore, in this analysis brief we will be discussing the both the pro forma balance sheet and income statement, as well any implications that of current liabilities, revenue recognition, and inventory costing. Additionally, it will be discussed if there were any potential issues that was found in preparing the financial statements that could impact the expansion of business by the addition of a second location. We are going to primarily focus on the financial statements that were generated from Peyton Approved during the 2015 – 2018 time period.

The first item to be discussed is the creation of the pro forma statements themselves. Using these financial statements, it can be analyzed to make the final decision about expanding the current business to a second location, when a business is considering making this expansion, there are several other expenses that need to be taken into consideration in addition to the current expenses for the current location. Additional expenses such as additional inventory, cost of acquiring new employees, purchase and maintenance of new equipment, and the cost of leasing the additional space for the second location. The use of pro forma balance sheet statements is not regulated or made by by the GAAP (Generally Accepted Accounting Principles), as they are only a tool to help predict the potential possibility of what could happen based on the current financial data, therefore, it is also critical that the information given about the pro forma balance sheet is a not a financial fact, only projections when showing this to potential investors of the organization. The pro forma income statement shows a positive project for the additional location, however that income is still projected to be 42.2% lower than the net income that it is receiving at the location it currently occupies. However, in the bigger picture, it is my recommendation to continue with the expansion, as they still be operating with making a profit at the additional location, and the overall bottom line of the organization would still be increased by the expansion.

However, there are also some issues that do need to be discussed which include inventory costing, contingent liabilities, and revenue recognition. The first issue that we will address is the use of the LIFO (last in, first out) system that is currently in place. While, this inventory system considers the most recently made products to be the first products that are sold, it does create a lot of waste. Changing the system over to a FIFO (first in, first out) would create less waste and also generate higher revenue due to the decreased waste and decreased inventory cost (Kenton, 2018). Additionally, it does need to be kept in mind that the when you change the system of how inventory is managed, then the amount of inventory dollars is going to change on the statements as well.

Kenton (2018) defines contingent liability as “potential liability that may occur depending on the outcome of an uncertain event.” One way to think about this would be consider what would happen if the organization was in a lawsuit or produced products that the organization had decided would come with a warranty, which from a financial statement point of view should be recorded on a balance sheet. An example would be the organization got hit with legal fees in the amount of one million dollars, which the accountant would then record as a debit of one million dollars and would place a one-million-dollar credit in accrued expense. These are contingent because there is no way to predict if the organization is going to have them, however, it is a good idea to have an estimated amount and make sure that amount is included on the financial statements of the organization.

The third issue that needs to be addressed is revenue recognition. CFI Education, Inc (2019) “revenue recognition is an accounting principal that outlines the specific conditions under which revenue is recognized.” Additionally, it is stated CFI Education, Inc (2019) “there are five principals that are used for recognizing revenue; identification of client contact, identification of obligations in client contract, determination of the price of transaction, allocate the transaction price according to the performance obligations in the client contract, and recognize the revenue when the performance obligations are met. These five principals are established by the FASB (Financial Accounting Standard Board) which also sets the standards for the United States General Accepted Accounting Principles.” Being able to predict revenue recognition is not a task that can be done easily, therefore the best way to handle these projections is to use the prior’s year’s financial statements.

Regarding the pro forma statements, when those statements are being prepared to be presented to stockholders, management, and investors, it is best to make sure that they are being prepared the same way each time in order to ensure that the information being presented in those reports is accurate. Due to the fact, that different organizations use different ways to have these documents prepared, it could be helpful if a brief description of how the financial document was prepared was made available to the person who is reading the document and analyzing the data that is contained in the report. Additionally, the other expenses like depreciation, interest and taxes, one-time expenses, amortization, losses from affiliates, and restructuring cost are all items that are typically not seem on these pro forma statements. Simply due to these items not being considered to being a true expense of the organization, that is why that are not being listed as an expense of the organization, nor can they be considered to show earning potential of the organization.

Based on the given information and looking at both the pro forma income statement and balance sheet, expanding to the second location would be a good idea for Peyton Approved. Although, based on the information, there will be a decrease in the net income for the first year of the organization being in the new location, it will ultimately bring in additionally revenue and increase the bottom-line profit of the organization. Therefore, based on the bigger picture and looking at the financial health of the organization overall, yes this would be a good move for the organization, and would recommend the expansion.

References

CFI Education Inc. (2019). Revenue Recognition – Principles, Criteria for Recognizing Revenues. Retrieved April 1, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/accounting/revenue-recognition/

Kenton, W. (2018, December 13). Contingent Liability. Retrieved April 1, 2022, from https://www.investopedia.com/terms/c/contingentliability.asp

Kenton, W. (2018, December 13). Last In, First Out – LIFO. Retrieved April 1, 2022, from https://www.investopedia.com/terms/l/lifo.asp

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ACC 308 Final Project: Milestone II Part II: Financial Notes

Tim Weaver

Southern New Hampshire University

Notes of Financial Statements

Note 01 – Supplies

The ability of being able to manage the supplies that are needed for the company to be able to continue growth and operate in the most efficient way is called Supply Management. This not only allows relates to the ability of the organization to be able to manage, obtain, and identify essential supplies for organizational operations, but is also allows the organization to be able to obtain the required information, physical good, and services they need (Supply Management: An Overview, 2019). The essential focus on supply management is maintaining control of cost of supplies, gathering of data to make sound business decisions, and resource allocation. Peyton Approved organization has a supplies total of $27,986.00. It is critically essential that the organization has clear understanding of raw materials, cost, and the products made in the end to ensure that there is no errors and risk has been ensured to be minimized in how the organization manages its supplies.

Note 02 – Inventory

The organization of Peyton Approved uses a Last In, First Out (LIFO) inventory management system. While this LIFO system would be good to use for somethings, it would not be recommended to be used on all of the organizations products. The organization currently has a merchandise inventory valued at $229.27. The organization, should ideally be continually looking for ways in which it would be possible to keep this amount at a minimum cost. This cost minimized would be associated with supplies, manufacturing of products, merchandise, and inventory. One of the methods that can be used to keep current and accurate inventory reports in order to be able to forecast supply demand and also avoid shortages. Instituting the use of inventory reports would be highly recommended as it will help ensure accurate inventory management at both locations of the organization and help ensure that neither location has a supply shortage.

Note 03 – Depreciation

The organization uses straight-line method in order to calculate the amount of depreciation. This method of calculation, as described by Bragg (2019) states that this method is calculated by equally distributing the depreciation through the life time of the given asset, the simplest method to use, and has the least likelihood of errors. While they use this method at the main location, it would be highly recommended that they continue to use particular method at the second location as well. Additionally, this would also allow the management team, investors, and shareholders in the organization to look at the equipment depreciation evenly at both locations, and would keep the comparisons on an equal playing field. When looking at both the Pro Forma Balance Sheets and Income Statements it can be seem that the depreciation is values at $2,143.00

Note 04 – Long Term Debt

The organization has one long-term debt, which is a loan that is scheduled to last 5 years, or 60 months with an interest rate of 7.5 APR. The loan was originated on June 1, 2016 and the principal amount of the loan $15,00, which is due on May 31, 2026, which only interest amount of $211.46 being due on an annual basis. Would recommend paying the loan off as quickly as possible, however if the loan had to be spread out, ear marking $3,000 each year, would allow for an even spread of the $15,0000 over a 5-year period. Total loan with the addition of interest for the full duration would be $16,057.30, would yearly would be $3,211.46.

References

Bragg, S. (2019). Straight line depreciation. Retrieved April 3, 2022, from https://www.accountingtools.com/articles/2017/5/15/straight-line-depreciation

Supply Management: An Overview. (2019). Retrieved April 3 2022, from https://www.investopedia.com/terms/s/supplymanagement.asp

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