HAPPY

CAMPER
PARK
Point of View

This study focuses on the perspective of the possible

creditors of the entity.
Introduction

 Happy Camper Park was organized on April 1, 2016, by Erica

Hatt.

 Erica prepared an Income Statement out from the Trial

Balance prepared by her bookkeeper.

 From the Income Statement, Erica was confused because the

net income had never exceeded $20,000 in any one quarter.
Introduction
HAPPY CAMPER PARK
Income Statement
For the Quarter Ended March 31, 2017

Revenue
Rent Revenue 90,000.00
Operating Expenses
Advertising 5,200.00
Salaries and Wages 29,800.00
Utilities 900.00
Depreciation 800.00
Maintenance and Repairs 4,000.00
Total Operating Expenses 40,700.00
Net Income 49,300.00
Introduction
 Supplies 6,200.00
 Prepaid Insurance 7,200.00
 Notes Payable 12,000.00

1. Rent revenue include advance rentals for summer occupancy

15,000.00

2. There were 1,700.00 supplies on hand on March 31, 2019.

3. Prepaid insurance resulted from payment of a one-year policy

on January 1, 2017.
4. Mail on April 1, brought the following bills: advertising for week of
March 24, 110.00; repairs made on March 10, 260.00 and utilities,
180.00

5. Incurred but unpaid wages for four employees at 300.00 per day
for 2 days on March

6. 3-month note payable, 10% note dated January 1, 2017.

Statement of the Problem

The creditor has to decide whether to lend or not to lend

money on the business by looking into the Income Statement
provided.
Objectives

To identify whether to lend or not to lend money to

Happy Camper Park entity using data on the income
statement
Areas of Considerations
 Net Income

Net income, also called net profit, is a calculation that

measures the amount of total revenues that exceed total
expenses. It other words, it shows how much revenues are left
over after all expenses have been paid. Creditors want to know
the company if the entity is financially sound and able to pay off
its debt with successful operations.
Areas of Considerations
 Profit Margin Ratio

A profit margin ratio is one of the most common ratios

used to determine the profitability of business activity. It shows
the profit per sale after all other expenses are deducted. It
measures how much profits are produced at a certain level of
sales. This ratio also indirectly measures how well a company
manages its expenses relative to its net sales. Entity tends to
generate more revenues while keeping expenses constant or
keep revenues constant and lower expenses to maintain a
higher profit margin ratio. Creditors and investors use this ratio to
measure how effectively a company can convert sales into net
income.
SWOT Analysis
 Strengths
The entity has a good manager

 Weaknesses
The entity has a poor bookkeeper who unable to
recognize the unearned revenue and accrued expenses

 Opportunities
Available creditors for additional financing to expand the
business

 Threats
BIR may collect taxes beyond what is due
End-users negative implications on the misleading
financial statement
Advantages/Disadvantages/Cost of Each
Alternative
Case: If the creditor considers lending money to the entity
which will be used for financing the entity’s expansion
amounting to Fifty Thousand Pesos Only (P50,000.00) with an
interest of 12% annually payable for 3 years.

Alternative 1. Lend money to the entity

Advantages: Interest income is fixed to P3,000.00
annually.
Keep good relationship with the debtor
for future business transactions

Disadvantage:Possible loss of P50,000.00 and its interest if

the entity can’t pay the amount due to
unpredictable events may happen in the
business.
Advantages/Disadvantages/Cost of Each
Alternative
Case: If the creditor considers lending money to the entity
which will be used for financing the entity’s expansion
amounting to Fifty Thousand Pesos Only (P50,000.00) with an
interest of 12% annually payable for 3 years.

Alternative 1. Do not lend money to the entity

Advantages: No risk at all.

Disadvantage: Lost of interest income amounting

to P9,000.00.
Financial Analysis
 Presented Income Statement
Financial Analysis
 Adjustments:
1.) Revenue:
Rent Revenue 90,000.00
Less: Unearned Rent Revenue 15,000.00
Adjusted Revenue 75,000.00

Adjusting Entry:
Rent Revenue 15,000.00
Unearned Rent Revenue 15,000.00
To record unearned rent revenue.
Financial Analysis
 Adjustments:
2.) Supplies:
Supplies 6,200.00
Supplies on Hand 1,700.00
Supplies Expense 4,500.00

Adjusting Entry:

Supplies Expense 4,500.00

Supplies 4,500.00
To record supplies used.
Financial Analysis
 Adjustments:
3.) Insurance:
Insurance Expense (7,200*3/12) 1,800.00
Adjusting Entry:

Insurance Expense 1,800.00

Prepaid Insurance 1,800.00
To record insurance expense.
4.) Advertising 110.00
Maintenance and Repairs 260.00
Utilities 180.00
Adjusting Entry:
Advertising Expense 110.00
Maintenance and Repairs 260.00
Utilities Expense 180.00
Expense Payable 550.00
To record unpaid expenses.
Financial Analysis
 Adjustments:
5.) Salaries and Wages (300*2) 600.00
Adjusting Entry:

Salaries and Wages 600.00

Salaries and Wages Payable 600.00
To record unpaid salaries and wages.

6.) Interest Expense (12000*10%*3/12) 300.00

Adjusting Entry:

Interest Expense 300.00

Interest Payable 300.00
To record interest expense for the quarter.
Corrected Income Statement
Financial Analysis
 Profit Margin Ratio

The profit margin ratio for the quarter

ended March 31, 2019 is 35%. This means that
35% net income is expected in every level of
revenue made.
Financial Analysis
 Net Income after Financial Expense

If the net income of the remains constant

throughout the year after additional financing,
the entity will still be able to pay the interest due
for the year.
Financial Analysis
 Projected Income Statement
 Conclusion and Recommendations

Therefore, the creditor will consider lending an

amount to Happy Camper Park because the entity has
an income P26,550.00 for the quarter ended March 31,
2017, and has a projected annual net income of
P95,393.90. It only shows that if there are expansions,
repairs and additional equipment’s, Happy Camper Park
will able to increase its capacity and cater more clients
which leads to higher income for the most demand
period. The creditor looks into the net income and
analyses that the higher the income the bigger chances
that the entity will be able to pay the loan.
 Conclusion and Recommendations

The income statement to be more useful for

decision making of the creditor, it must be in all aspect
presented fairly which already include the recognition of
accrued expenses and properly classifying the prepaid
expenses and unearned revenue to assets and liabilities
during the period reported.
 Conclusion and Recommendations

Miscalculating revenue or net income leads to

incorrect valuation of the entity. Creditors use the
revenues generated to determine its earnings capacity
for future periods. An incorrect income statement affects
the profitability ratio which the creditor usually look into
aside from net income and debt-to-equity ratio.

Expenses form a major portion of the income

statement, and miscalculating expense items affects net
income and affects the overall analysis of the profitability
of the operation. Any increase or decrease in the amount
reported will affect the decision of the creditor to lend or
not to lend a certain amount for the entity.