ACC 501 FINANCIAL ACCOUNTING & REPORTING

Group Study 1

Group No.1 Members

Billur Kayador

Mert Sevinç

Çağlar Dönmezler

Akın 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 company’s 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

DateEntry No. Accounts and Explanation Debit Credit

1/2/2003 1

Intengible Assets (patent) $ 125,000 Cash $ 375,000

Shareholder's Equity $ 500,000 Establishmnet of Chemalite, Inc.

1/15/2003 2Incorporation Expenses $ 7,500

Cash $ 7,500 Expenses like legal fees, charter costs...etc

6/15/2003 3PP&E $ 62,500

Cash $ 62,500 Building the machinery

6/24/2003 4Inventory $ 75,000

Cash $ 75,000 Purchasing Inventory

Table 2. T-accounts for the six months ended June 30, 2003

Assets Liabilities and Shareholders' EquityCash Shareholder's Equity

1 $ 375,000 $ 7,500 2 $ 500,000 1 $ 62,500 3 $ 500,000 $ 75,000 4 $ 230,000

Intengible Assets Expense and Revenue Accounts1 $ 125,000 Incorporation Expenses

$ 125,000 2 $ 7,500 $ 7,500

PP&E3 $ 62,500

$ 62,500

Inventory4 $ 75,000

$ 75,000

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 $ -7,500 Operating Profit $ -7,500 Profit before Tax $ -7,500Tax $ - Net Income (Loss) $ -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 $ 230,000 Inventory $ 75,000

Total Current Assets $ 305,000 PP&E $ 62,500 Intangible Assets $ 125,000 TOTAL ASSETS $ 492,500 SHAREHOLDERS' EQUITY AND LIABILITIES Current Liabilities

Accounts Payable $ - Total Current Liabilities $ -

Shareholders' EquityCapital $ 500,000 Retained Earnings $ -7,500

Total Shareholders' Equity $ 492,500 TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 492,500

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

OPERATING ACTIVITIES Net Income $ -7,500Depreciation and Amortization $ -Change in Account Receivable $ -Change in Inventory $ -75,000Change in Current Liabilities $ -

Net Cash provided by Operating Activities $ -82,500 INVESTING ACTIVITIES

Purchase of equipment $ -62,500Net Cash used by Investing Activities $ -62,500

FINANCING ACTIVITIES

Net Cash provided by Financing Activities $ - CASH and CASH EQUIVALENTS

Cash balance on Jan 1, 2003 $ 375,000

End of Period $ 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. Accounts and Explanation Debit Credit

1/2/2003 1

Intengible Assets (patent) $ 125,000

Cash $ 375,000

Shareholder's Equity $ 500,000

Establishment of Chemalite, Inc.

1/15/2003 2Incorporation Expenses $ 7,500

Cash $ 7,500

Expenses like legal fees, charter costs...etc

6/15/2003 3

PP&E $ 62,500

Cash $ 62,500

Building the machinery

6/24/2003 4Inventory $ 75,000

Cash $ 75,000

Purchasing Inventory

7/1/2003 5Prototype $ 23,750

Cash $ 23,750

Purchase of protoype

7-12/1/2003 6

Cash $ 685,000

Account Receivable $ 69,500

Sales $ 754,500

Sales to auto parts distributor

7-12/1/2003 7Inventory $ 175,000

Cash $ 175,000

Purchasing additional inventory

7-12/1/2003 8Advertising and Promotion (A&P) Expense $ 22,500

Cash $ 22,500

Television and trade journal advertising

7-12/1/2003 9COGS $ 350,000

Salaries, General and Administration (SGA) $ 80,000

Cash $ 430,000

Direct manufacturing labor and overhead

7-12/1/2003 10PP&E $ 150,000

Cash $ 150,000

Purchase of machinery

7-12/1/2003 11Interest Expense $ 750

Cash $ 750

Interest expense of loan

7-12/1/2003 12COGS $ 195,000

Inventory (250000-55000) $ 195,000

Remaining Inventory

7-12/1/2003 13Depreciation Expense (125000/5) $ 25,000

Intengible Assets (patent) $ 25,000

Depreciation expense of patent

7-12/1/2003 14Depreciation Expense (150000/20) $ 7,500

PP&E $ 7,500

6 month dep. of newly bought machine

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

Assets Liabilities and Shareholders' EquityCash Shareholder's Equity

1 $ 375,000 $ 7,500 2 $ 500,000 16 $ 685,000 $ 62,500 3 $ 500,000

$ 75,000 4 $ 23,750 5 $ 175,000 7 $ 22,500 8 Expense and Revenue Accounts $ 430,000 9 Incorporation Expenses $ 150,000 10 2 $ 7,500 $ 750 11 $ 7,500 $ 113,000

SalesIntengible Assets $ 754,500 6

1 $ 125,000 $ 25,000 13 $ 754,500 $ 100,000

A&P ExpensePP&E 8 $ 22,500

3 $ 62,500 $ 7,500 14 $ 22,500 10 $ 150,000

$ 205,000 SGA9 $ 80,000

Inventory $ 80,000 4 $ 75,000 $ 195,000 127 $ 175,000 COGS

$ 55,000 9 $ 350,000 12 $ 195,000

Protoype $ 545,000 5 $ 23,750

$ 23,750 Interest Expense11 $ 750

Accounts Receivable $ 750 6 $ 69,500

$ 69,500 Depreciation Expense13 $ 25,000 14 $ 7,500

$ 32,500

Table 8. Income statement for the year ended December 31, 2003

Net Sales $ 754,500

Cost of Sales $ -545,000 Gross Profit $ 209,500SGA $ -80,000Incorporation Expenses $ -7,500A&P $ -22,500Depreciation Expenses $ -32,500 Operating Profit $ 67,000Interest Expense $ -750 Profit before Tax $ 66,250Tax $ - Net Income (Profit) $ 66,250

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

ASSETS Current Assets

Cash $ 113,000Accounts Receivable $ 69,500Inventory $ 55,000

Total Current Assets $ 237,500PP&E $ 205,000Prototype $ 23,750Intangible Assets $ 100,000TOTAL ASSETS $ 566,250 SHAREHOLDERS' EQUITY AND LIABILITIES Current Liabilities

Accounts Payable $ -Total Current Liabilities $ -

Shareholders' EquityCapital $ 500,000Retained Earnings $ 66,250

Total Shareholders' Equity $ 566,250TOTAL SHAREHOLDERS' EQUITY AND LIABILITIES $ 566,250

Table 10. Statement of cash flows for the year ended December 31, 2003

OPERATING ACTIVITIES Net Income $ 66,250

Depreciation and Amortization $ 32,500Change in Account Receivable $ -69,500Change in Inventory $ -55,000Change in Current Liabilities $ -

Net Cash provided by Operating Activities $ -25,750 INVESTING ACTIVITIES

Purchase of equipment $ -212,500Prototype Purchase $ -23,750

Net Cash used by Investing Activities $ -236,250 FINANCING ACTIVITIES

Net Cash provided by Financing Activities $ - CASH and CASH EQUIVALENTS

Cash balance on Jan 1, 2003 $ 375,000

End of Period $ 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 owner’s 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 stockholder’s 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.