Interpreting Financial Statements Essay

Description

Scenario

You are the owner of a small business, Julian’s Car Repair. You start work each day by checking your office mail. As you look through the mail, you come to a letter from the bank that your business works closely with. You are notified that your net income has decreased significantly from last month.

Recently, there has been an increase in unanticipated expenses for your repair shop. Unfortunately, an active hurricane season has severely impacted the oil refineries and caused the price of oil to spike. To further affect your situation, recent tariffs have caused the cost of steel to increase. Because of this, your suppliers have increased the cost of their auto parts and have begun charging extra to deliver the parts.

Because of these changes, the bank has showed concern for your business. You have a meeting with the senior investment officer next week to discuss continuing your business’s line of credit with the bank. As the owner, you will need to analyze your financial statements and write a proposal to the senior investment officer that identifies the areas that need improvement and includes a plan to improve your business’s financial performance.

Directions

Proposal to the Bank Investment Officer: You share the letter you received from the bank with your accountant and they suggest a meeting to discuss how to prepare an effective proposal to maintain your line of credit. In your meeting with your accountant, you gain the following insight and are given the following recommendations:

Analysis: Your accountant explains that it is your responsibility to constantly monitor financial activities of your business. You will need to analyze your financial statements to determine the current state of your business. Specifically, a successful proposal will include a financial analysis that addresses the following:

Analyze the appropriate line items for each financial statement (income statement, statement of equity, and balance sheet). Consider what information each financial statement provides regarding the financial performance of your business.

Use your financial statements to assess the business’s current financial state. Consider what the financial statements say about the strengths and weaknesses of your business, and identify any areas of concern.

  • Action Plan: Your accountant explains that you will need to come prepared to discuss the changes you plan to make to improve your situation. Consider how you can use the financial information to control and monitor your business. Your accountant recommends that you be proactive and wants you to include a plan of action in your proposal to discuss with the investment officer. The plan of action should addresses the following: 

Propose operational changes that will improve business performance. For instance, should you increase your prices? Should you look for new vendors? Does it make sense to tighten your credit policies?

Using your analysis of the financial information, explain the reasoning behind your proposed managerial decisions.

Unformatted Attachment Preview

Julian’s Car Repair
Income Statement
June 1 – June 30, 2018
Revenue
Sales revenue
Expenses
Cost of goods sold
Advertising
Wage expense
Rent expense
Utilities expense
Trash
Uniforms
Bldg / Liab insurance
Depreciation Expense
Net Income
Julian’s Car Repair
Statement of Change in Equity
June 1 – June 30, 2018
Julian Smith, Capital, May 31, 2018
Net income
Less: withdrawals
Equity June 30, 2018
Julian’s Car Repair
Balance Sheet
June 30, 2018
Assets
Cash
Accounts Receivable
Shop supplies
Prepaid insurance
Shop equipment
Accumulated Depreciation
Total Assets
Liabilities
Accounts Payable
Wages payable
Note Payable
Total Liabilities
Equity
Total Liabilities & Equity
$ 37,000.00
$ 20,000.00
2,000.00
4,000.00
3,500.00
1,000.00
400.00
480.00
500.00
300.00
$ 16,380.00
4,820.00
4,000.00
$ 17,200.00
$
2,000.00
3,200.00
4,000.00
6,000.00
15,000.00
(6,000.00)
$ 24,200.00
$
1,000.00
1,000.00
5,000.00
7,000.00
17,200.00
$ 24,200.00
32,180.00
$ 4,820.00
Julian’s Car Repair
Income Statement
July 1 – July 31, 2018
Revenue
Sales revenue
Expenses
Cost of goods sold
Advertising
Wage expense
Rent expense
Utilities expense
Trash
Uniforms
Bldg / Liab insurance
Depreciation Expense
Net Income
Julian’s Car Repair
Statement of Change in Equity
July 1 – July 31, 2018
Julian Smith, Capital, June 30, 2018
Net income
Less: withdrawals
Equity July 31, 2018
Julian’s Car Repair
Balance Sheet
July 31, 2018
Assets
Cash
Accounts Receivable
Shop supplies
Prepaid insurance
Shop equipment
Accumulated Depreciation
Total Assets
Liabilities
Accounts Payable
Wages payable
Note Payable
Total Liabilities
Equity
Total Liabilities & Equity
$ 35,000.00
$ 22,000.00
2,000.00
4,700.00
3,500.00
1,150.00
470.00
510.00
500.00
$
$ 17,200.00
170.00
4,000.00
$ 13,370.00
$ 1,100.00
4,000.00
4,500.00
5,000.00
15,000.00
(6,250.00)
$ 23,350.00
$ 4,180.00
1,300.00
4,500.00
9,980.00
13,370.00
$ 23,350.00
34,830.00
170.00
Julian’s Car Audio
Income Statement
June 1 – June 30, 2018
Revenue
Sales revenue
Expenses
Cost of goods sold
Advertising
Wage expense
Rent expense
Utilities expense
Trash
Uniforms
Bldg / Liab insurance
Depreciation Expense
Net Income
Julian’s Car Audio
Statement of Change in Equity
June 1 – June 30, 2018
Julian Smith, Capital, May 31, 2018
Net income
Less: withdrawals
Equity June 30, 2018
Julian’s Car Audio
Balance Sheet
June 30, 2018
Assets
Cash
Accounts Receivable
Shop supplies
Prepaid insurance
Shop equipment
Accumulated Depreciation
Total Assets
Liabilities
Accounts Payable
Wages payable
Note Payable
Total Liabilities
Equity
Total Liabilities & Equity
$ 40,245.00
$ 18,450.00
1,800.00
3,850.00
3,500.00
1,000.00
400.00
480.00
500.00
300.00
$ 16,380.00
9,965.00
5,500.00
$ 20,845.00
5,645.00
3,200.00
4,000.00
6,000.00
15,000.00
(6,000.00)
27,845.00
1,000.00
1,000.00
5,000.00
7,000.00
20,845.00
27,845.00
30,280.00
$ 9,965.00
Julian’s Car Audio
Income Statement
July 1 – July 31, 2018
Revenue
Sales revenue
Expenses
Cost of goods sold
Advertising
Wage expense
Rent expense
Utilities expense
Trash
Uniforms
Bldg / Liab insurance
Depreciation Expense
Net Income
Julian’s Car Audio
Statement of Change in Equity
July 1 – July 31, 2018
Julian Smith, Capital, June 30, 2018
Net income
Less: withdrawals
Equity July 31, 2018
Julian’s Car Audio
Balance Sheet
July 31, 2018
Assets
Cash
Accounts Receivable
Shop supplies
Prepaid insurance
Shop equipment
Accumulated Depreciation
Total Assets
Liabilities
Accounts Payable
Wages payable
Note Payable
Total Liabilities
Equity
Total Liabilities & Equity
Safari pg
Fig 2-4
$ 37,002.00
$ 23,800.00
1,700.00
4,775.00
3,500.00
1,125.00
475.00
518.00
500.00
36,393.00
$
609.00
$ 20,845.00
609.00
4,000.00
$ 17,454.00
4,422.00
4,428.00
4,834.00
5,000.00
15,000.00
(6,250.00)
27,434.00
4,180.00
1,300.00
4,500.00
9,980.00
17,454.00
27,434.00
Safari
fig 2-5
uses Change in shareholder’
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This is flexible – want to match the text or use this?

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