ACC 501 FINANCIAL ACCOUNTING & REPORTING Group Study 1

Group No.1 Members Billur Kayador Mert Sevin alar Dnmezler Akn Albayrak

Instructor Prof.Dr. Recep Pekdemir

November 8, 2010

2010/2011 Fall Sabanci University

EXECUTIVE SUMMARY
In the case of Chemalite, Inc. we analyzed the financial data provided by one of the largest stockholders of the company, Bennett Alexander, and the companys bookkeeper. According to given expenditures, transactions, cash outflows and other related financial information; we prepared transaction journals, T-accounts, income statements, statements of financial position and statements of cash flows for the six months ended June 30, 2003 and for the year ended December 31, 2003. We then concluded our report with an analysis about the financial performance of Chemalite, Inc. for its first year.

THE DATA
The case of Chemalite, Inc. gives detailed information about how the company was formed and the financial data of the year 2003. The expenditures, transactions and cash outflows are given in two halfs of the year 2003.

SOFTWARE
Our analysis was performed entirely in Excel 2007.

ANALYSIS
The first question asks to prepare a summary of the cash transactions for the six months ended June 30, 2003. The summary and the T-accounts are shown in Table 1 and Table 2.

Table 1. Cash transactions for the six months ended June 30, 2003
Entry No.

Date

1/2/2003

1/15/2003

Accounts and Explanation Intengible Assets (patent) Cash Shareholder's Equity Establishmnet of Chemalite, Inc. Incorporation Expenses Cash Expenses like legal fees, charter costs...etc PP&E Cash Building the machinery Inventory Cash Purchasing Inventory

Debit $ 125,000 $ 375,000

Credit

$ 500,000 $ 7,500 $ $ 62,500 $ 62,500 $ 75,000 $ 75,000 7,500

6/15/2003

6/24/2003

Table 2. T-accounts for the six months ended June 30, 2003
Assets Cash 1 $ 375,000 $ Liabilities and Shareholders' Equity Shareholder's Equity $ 500,000 $ 500,000

7,500

2 3 4

$ 62,500 $ 75,000 $ 230,000 Intengible Assets 1 $ 125,000 $ 125,000 PP&E 3 $ 62,500 $ 62,500 Inventory 4 $ 75,000 $ 75,000

Expense and Revenue Accounts Incorporation Expenses 2 $ $ 7,500 7,500

The second question asks to prepare an income statement for the six months ended June 30, 2003. The income statement is shown in Table 3.

Table 3. The income statement for the six months ended June 30, 2003
Net Sales Cost of Sales Gross Profit Operating Expenses Operating Profit Profit before Tax Tax Net Income (Loss) $ $ $ $ $ $ $ $ -7,500 -7,500 -7,500 -7,500

Mr. Larson, one of the stockholders of Chemalite, Inc. believes that the company lost $145,000 in six months. However, it is clear from the income statement which is presented above that the company only lost $7,500 during these six months.

The third question asks to prepare a statement of financial position at June 30, 2003 and a statement of cash flows for the six-month period. These statements are shown in Table 4 and Table 5.

Table 4. Statement of financial position at June 30, 2003

ASSETS Current Assets Cash Inventory PP&E Intangible Assets TOTAL ASSETS SHAREHOLDERS' EQUITY AND LIABILITIES Current Liabilities Accounts Payable Shareholders' Equity Capital Retained Earnings

$ $ Total Current Assets $ $ $ $

230,000 75,000 305,000 62,500 125,000 492,500

$ Total Current Liabilities $

500,000 -7,500 492,500 492,500

$ $ Total Shareholders' Equity $ TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $

Table 5. Statement of cash flows for the six-month period

OPERATING ACTIVITIES Net Income Depreciation and Amortization Change in Account Receivable Change in Inventory Change in Current Liabilities Net Cash provided by Operating Activities INVESTING ACTIVITIES Purchase of equipment Net Cash used by Investing Activities FINANCING ACTIVITIES Net Cash provided by Financing Activities CASH and CASH EQUIVALENTS Cash balance on Jan 1, 2003 End of Period

$ $ $ $ $ $

-7,500 -75,000 -82,500

$ $

-62,500 -62,500

$ $

375,000 230,000

The forth question asks to prepare a statement of financial position at December 31, 2003, an income statement and a statement of cash flows for the year ended December 31, 2003. These statements and also the transaction journal and T-accounts for the year ended December 31, 2003 are shown in Table 6, Table 7, Table 8, Table 9 and Table 10.

Table 6. Transaction journal for the year ended December 31, 2003
Date Entry No. Cash Shareholder's Equity Establishment of Chemalite, Inc. Incorporation Expenses 1/15/2003 2 PP&E 6/15/2003 3 Cash Building the machinery Inventory 6/24/2003 4 Cash Purchasing Inventory Prototype 7/1/2003 5 Cash Purchase of protoype Cash 7-12/1/2003 6 Account Receivable Sales Sales to auto parts distributor Inventory 7-12/1/2003 7 Cash Purchasing additional inventory Advertising and Promotion (A&P) Expense 7-12/1/2003 8 Cash Television and trade journal advertising 7-12/1/2003 9 COGS Salaries, General and Administration (SGA) $ 350,000 $ 80,000 $ 22,500 $ 22,500 $ 175,000 $ 175,000 $ 685,000 $ 69,500 $ 754,500 $ 23,750 $ 23,750 $ 75,000 $ 75,000 Cash Expenses like legal fees, charter costs...etc $ 62,500 $ 62,500 $ 7,500 $ 7,500 Accounts and Explanation Intengible Assets (patent) 1/2/2003 1 Debit $ 125,000 $ 375,000 $ 500,000 Credit

Cash Direct manufacturing labor and overhead PP&E 7-12/1/2003 10 Cash Purchase of machinery Interest Expense 7-12/1/2003 11 COGS 7-12/1/2003 12 Inventory (250000-55000) Remaining Inventory Depreciation Expense (125000/5) 7-12/1/2003 13 Intengible Assets (patent) Depreciation expense of patent Depreciation Expense (150000/20) 7-12/1/2003 14 PP&E 6 month dep. of newly bought machine $ 7,500 $ 25,000 Cash Interest expense of loan $ 195,000 $ 750 $ 150,000

$ 430,000

$ 150,000

750

$ 195,000

$ 25,000

7,500

Table 7. T-accounts for the year ended December 31, 2003

Assets Cash 375,000 $ 685,000 $ $ $ $ $ $ $ $ $ 113,000 Intengible Assets 1 $ $ 125,000 100,000 PP&E 3 $ 10 $ $ 62,500 150,000 205,000 9 $ 4 $ 7 $ $ Inventory 75,000 $ 195,000 175,000 55,000 Protoype 23,750 23,750 11 $ 6 $ $ Accounts Receivable 69,500 69,500 13 $ 14 $ $ $ $ 12 COGS 9 $ 12 $ $ 350,000 195,000 545,000 Interest Expense 750 750 Depreciation Expense 25,000 7,500 32,500 80,000 80,000 $ 7,500 14 8 $ $ A&P Expense 22,500 22,500 SGA $ 25,000 13 Sales $ $ 754,500 754,500 6 Liabilities and Shareholders' Equity Shareholder's Equity $ 500,000 $ 500,000

1 $ 6 $

7,500 62,500 75,000 23,750 175,000 22,500 430,000 150,000 750

2 3 4 5 7 8 9 10 11

Expense and Revenue Accounts Incorporation Expenses 2 $ 7,500 $ 7,500

5 $ $

Table 8. Income statement for the year ended December 31, 2003
Net Sales Cost of Sales Gross Profit SGA Incorporation Expenses A&P Depreciation Expenses Operating Profit Interest Expense Profit before Tax Tax Net Income (Profit) $ $ $ $ $ $ $ $ $ $ $ $ 754,500 -545,000 209,500 -80,000 -7,500 -22,500 -32,500 67,000 -750 66,250 66,250

Table 9. Statement of financial position at December 31, 2003

ASSETS Current Assets Cash Accounts Receivable Inventory PP&E Prototype Intangible Assets TOTAL ASSETS SHAREHOLDERS' EQUITY AND LIABILITIES Current Liabilities Accounts Payable Shareholders' Equity Capital Retained Earnings

$ $ $ Total Current Assets $ $ $ $ $

113,000 69,500 55,000 237,500 205,000 23,750 100,000 566,250

$ Total Current Liabilities $

500,000 66,250 566,250 566,250

$ $ Total Shareholders' Equity $ TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $

Table 10. Statement of cash flows for the year ended December 31, 2003
OPERATING ACTIVITIES Net Income Depreciation and Amortization Change in Account Receivable Change in Inventory Change in Current Liabilities Net Cash provided by Operating Activities INVESTING ACTIVITIES Purchase of equipment Prototype Purchase Net Cash used by Investing Activities FINANCING ACTIVITIES Net Cash provided by Financing Activities CASH and CASH EQUIVALENTS Cash balance on Jan 1, 2003 End of Period

$ $ $ $ $ $

66,250 32,500 -69,500 -55,000 -25,750

$ -212,500 $ -23,750 $ -236,250

$ $

375,000 113,000

The last question asks to prepare a report to stockholders on the financial position of Chemalite, Inc. for its first year, January 1, 2003 to December 31, 2003. The report is presented below.

Dear Stockholder; For the past year (Jan 1 2003 Dec. 1 2003) we have been growing successfully although we are in a newly developing market and have just been operating in the industry for one year. Starting from July 2003, operations have been going swiftly and we have started to see our business grow firmly. We are proud to announce that our gross margin is currently 28% which indicates that we have been generating a significant amount of sales revenue in excess over the cost of the inventory sold. When we look at our income statement we see that the company generated $66,250 in profits, therefore owners equity has increased by the same amount as a result of our operations. Inventory turnover is 20 which shows that

Chemalite Inc. has cost of goods sold that is 20 times its average inventory level. This means that the company holds its inventory at an average of 18 days (365/20). Looking at the return on common stockholders equity, the company realized a 23% ratio, meaning for each 1$ invested or reinvested by common stockholders, Chemalite Inc. generates $0.23 of net earnings. Non-current assets have increased by 93% compared to the first half of the year, due to investments on PP&E, the prototype and acquiring the patent. After careful consideration of the cash flow activities, we see that the company has negative figures of net cash flow from operating activities, due to vast investments which will in return generate cash and raise more capital. The pre-operational expenses should be realized as investments to the business. Therefore the 145,000 decrease on cash balance is a misleading figure for the stockholders. The orders from the Olympic Games amounting for $90,000 will boost our cash inflow from operating activities and definitely help promote our product in the international market. The amount spent for the television and trade journal advertising to introduce our product has paid off its dividends in terms of orders received from the customers. As a result, the company is looking brighter into the future with no liabilities. Chemalites Inc. has generated promising levels of net income and most of cash expenses were spent on the improvement of the business. In addition to the successful growth of the company, Chemalites Inc. will operate in the upcoming year with a guaranteed $90,000 in sales revenue.