One of the measures of success in any business is profitability. All successful managers and business owners must have an understanding of how to assess the profitability of a company. This is done through the use of accounting.
By working through the accounting cycle, you will understand how money flows through a company and what other components are included in the assessment of profitability and financial stability. Using this information can also help you determine whether or not the organization can afford to stay open employing current practices. The accounting information helps you determine what types of changes might need to be made to allow the organization to become profitable if it is currently struggling financially. This process also helps you understand the level of commitment to attention to detail that is required in a successful business venture.
In the ratio analysis and memo, you will use course-provided information to 1) demonstrate the purpose and importance of the ratios used, and 2) communicate the results of operations to stakeholders and/or interested parties.
This assessment addresses the following course outcomes:
- Apply the accounting cycle to business transactions for communicating financial data
- Interpret financial statements for informing business decisions
- Analyze the importance of industry standards and regulations in the implementation of the accounting cycle in supporting responsible practices
Your dog, Peyton, has severe allergies and cannot have the usual store-bought dog treats. You have been making homemade treats for him that are all-natural and hypo-allergenic. Over the past year, you have been making and selling these treats out of your home and have been quite successful. You now have an opportunity to open your own dog treat bakery. You have decided on a corporate form of business and have named your company "Peyton Approved."
During the first part of this final project, you were asked to follow the business transactions for a six-month period from that initial stage of analysis and recording through the reporting process. Now, you will use this information to compose a memorandum to the bank detailing the results of operations as communicated in the financial statements you have produced based on the business transactions for the period.
Use your completed workbooks to prepare your ratio analysis and memo, which will include an overview of the company's accounting system, discussion of the results of operations and what those results mean, and a discussion on what changes in operations might need to be made to make the company more profitable. This memo will be used as part of a loan package to request additional funding for potential expansion in year two.
1. Ratio Analysis
a) Create a ratio analysis. Be sure to include all required ratios.
b) Annotate each ratio. What does the ratio tell you?
c) Why is ratio information useful? What decisions will you make based on the ratio?
2. Prepare a Memo to a Bank
a) Provide an overview of the company's accounting system. What basis of accounting is used? Why?
b) What strategies is the business using to ensure responsible accounting practices? Why have these strategies been selected?
c) Describe the overall accounting process. For example, when are entries made, how often are statements produced and reviewed, and why?
Describe the internal controls for cash that are in place.
d) Analyze the results of operations. What do these results tell a business?
e) What do the statements themselves tell about the strengths and weaknesses of the company's financial position? What does the ratio analysis tell someone about the strengths and weaknesses in the company's financial position?
f) Discuss the changes in operations that might need to be made to make the company more profitable. Justify why each change may be
necessary.
g) What are the companys financial strengths and weaknesses? What specific changes can be made to alleviate the weaknesses?
h) What opportunities can the company explore because of its strengths? How would these be beneficial?