Management: Accounting Project

Accounting Project Michael Lawson & Yanqui Luo

ACCT 615‐ Fall 2009

Part 1: Ledger Accounts (as of 11/31)

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001 Assets

Nov‐31

Cash 140,000

Nov‐31

140,000

PPE Nov‐31 1,040,000 Nov‐31 480,000 Nov‐31 800,000

Nov‐31

Office Supplies 15,000

Nov‐31

15,000

Nov‐31 2,320,000

Nov‐31 Nov‐31

Accounts Recievable 165,000

Accumulated Depreciation Nov‐31 360,000 Nov‐31 180,000

165,000

Stock Investments (Long‐term) Nov‐31 230,000 Nov‐31

Nov‐31 Allowance for Doubtful Accounts Nov‐31 5,000 Nov‐31

5,000

230,000

540,000

Nov‐31

Goodwill 480,000

Nov‐31

Merchandise Inventory 180,000

Nov‐31

480,000

Nov‐31

180,000

Liablilties Bonds Payable Nov‐31 1,000,000

Accounts Payable Nov‐31

150,000

Nov‐31 1,000,000

Nov‐31

150,000

Stockholders' Equity Common Stock Nov‐31

200,000

Nov‐31

213,000

Nov‐31

Treasury Stock 100,000

Nov‐31

200,000

Nov‐31

213,000

Nov‐31

100,000

Retained Earnings Jan‐01

213,000

Investment Revenue Nov‐31

19,000

Sales Revenue Jan‐09 1,100,000

Jan‐01

213,000

Nov‐31

19,000

Nov‐31 1,100,000

Common Stock, Paid‐in Capital in excess of Par

Nov‐31

Cost of Goods Sold 650,000

Nov‐31

Nov‐31

650,000

Nov‐31

Nov‐31

Utilities Expense 22,000

Nov‐31

Nov‐31

22,000

Nov‐31

Advertising Expense 11,000 11,000 Insurance Expense 10,000 10,000

Nov‐31

Salaries Expense 480,000

Nov‐31

480,000

Part 2: General Journal

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001

General Journal Date 2009 3‐Dec

Account Title & Explanation

Dr. Merchandise Inventory (Asset ↑) Cr. Accounts Payable‐ Ann Co. (Liab ↑)

Ref

Debit

Credit

20,500 20,500

(1) 6‐Dec

Dr. Bad‐Debt Expense (Liab ↓) Cr. Accounts Recievable‐ Sheri Co. (Liab ↑)

4,000 4,000

(2) 8‐Dec

Dr. Cost of Goods Sold (Asset ↑) Cr. Inventory (Liab ↑) Dr. Accounts Recievable‐ Gamma Inc. (Asset ↑) Cr. Sales Revenue (Liab ↑)

24,000 24,000 50,000 50,000

(3) 10‐Dec

Dr. Cash (Asset ↑) Cr. Common Stock (Liab ↑) Cr. Common Stock, Paid in excess of Par (Liab ↑)

110,000 20,000 90,000

(4) 12‐Dec

Dr. Cash (Liab ↓) Cr. Accounts Recievable‐ Fried Co. (Equity ↑)

45,000 45,000

(5) 15‐Dec

Dr. Advertising Expense‐ The Investors (Liab ↓) Cr. Cash (Asset ↓)

600 600

(6) 19‐Dec

Dr. Accounts Payable‐ Hwang Co. (Liab ↓) Cr. Cash (Equity ↑)

40,000 40,000

(7) 24‐Dec

Dr. Prepaid Insurance (Liab ↓) Cr. Cash (Asset ↓)

9,000 9,000

(8) 27‐Dec

Dr. Cash (Asset ↑) Cr. Unearned Revenue (Liab ↑)

30,000

Dr. Retained Earnings (Equity ↓) Cr. Dividends Payable (Liab ↑)

20,000

30,000

(9) 28‐Dec

20,000

(10) 30‐Dec

Dr. Utilities Expense (Equity ↓) Cr. Cash (Asset ↓)

2,000

Dr. Salaries Expense (Equity ↓) Cr. Cash (Asset ↓)

22,500

2,000

(11) 31‐Dec (12)

22,500

Part 3: General Journal (Adjustments)

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001

General Journal (Adjustments) Account Title & Explanation

Date 2009 31‐Dec

Ref

Debit

Dr. Depreciation Expense (Buildings) Cr. Accumulated Depreciation

24,000

Dr. Depreciation Expense (Equipment) Cr. Accumulated Depreciation

21,000

Dr. Interest Expense Cr. Interest Payable

50,000

Dr. Supplies Expense Cr. Office Supplies

12,000

Dr. Bad‐Debt Expense Cr. Allowance for Doubtful Accounts

10,000

Credit

24,000

(a) 31‐Dec

21,000

(b) 31‐Dec

50,000

(c) 31‐Dec

12,000

(d) 31‐Dec

10,000

(e)

Income = Revenue-Expense = (Investment Revenue+ Sales Revenue)-(Advertising Expense+ COGS+ Insurance Expense+ Salaries Expense+ Utilities Expense+ Depreciation Expense+ Interest Expense+ Supplies Expense+ Tax Expense+ Bad-debt Expense) = 1,169,000 - 1,107,100 = $619,000 Tax=30%*619,000=$18,570 Net Income= 619,000-18,570=$43,330 Date 2009 31‐Dec (f)

Account Title & Explanation

Dr. Income Tax Cr. Tax Payable

Ref

Debit

Credit

18,570 18,570

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001

Part 3: Ledger Accounts (Adjustments) Assets

30‐Nov 10‐Dec 12‐Dec 27‐Dec

31‐Dec

30‐Nov 8‐Dec 31‐Dec

Cash 140,000 110,000 45,000 30,000

15‐Dec 19‐Dec 24‐Dec 30‐Dec 31‐Dec

600 40000 9,000 2,000 22,500

Accounts Recievable 165,000 6‐Dec 50,000 12‐Dec

4,000 45,000

PPE 30‐Nov 1,040,000 30‐Nov 480,000 30‐Nov 800,000

30‐Nov 31‐Dec

3,000

250,900

166,000

Allowance for Doubtful Accounts 30‐Nov 5,000 adj‐e 10,000 31‐Dec

31‐Dec

12,000

31‐Dec 2,320,000

Accumulated Depreciation 30‐Nov 360,000 30‐Nov 180,000 adj‐a 24,000 adj‐b 21,000 31‐Dec

24‐Dec

Office Supplies 15,000 adj‐d

30‐Nov

Goodwill 250,000

31‐Dec

250,000

Stock Investments (Long‐term) 30‐Nov 230,000 31‐Dec

230,000

585,000

30‐Nov 3‐Dec

15,000

31‐Dec

Merchandise Inventory 180,000 adj‐a 20,500

24,000

176,500

Prepaid Insurance 9,000 9,000 Liablilties Bonds Payable 30‐Nov 1,000,000

19‐Dec

Accounts Payable 40,000 30‐Nov 3‐Dec

150,000 20,500

31‐Dec

130,500

Dividends Payable 28‐Dec

20,000

31‐Dec

20,000

31‐Dec 1,000,000

Interest Payable 8‐Dec

50,000

Tax Payable adj‐f

18,750

Unearned Revenue 27‐Dec

30,000

31‐Dec

50,000

31‐Dec

18,750

31‐Dec

30,000

Stockholders' Equity

28‐Dec

Common Stock 30‐Nov 28‐Dec

200,000 20,000

30‐Nov 1,110,000 10‐Dec 90,000

30‐Nov

220,000

31‐Dec 1,200,000

Retained Earnings 20,000 1‐Jan (NI)

213,000 43,330

1‐Jan

236,330

Cost of Goods Sold 650,000 24,000

30‐Nov 15‐Dec

31‐Dec

674,000

31‐Dec

Utilities Expense 22,000 2,000

31‐Dec

24,000

30‐Nov 31‐Dec

adj‐d 31‐Dec

Supplies Expense 12,000

adj‐a adj‐b

31‐Dec

Investment Revenue 30‐Nov

19,000

31‐Dec

19,000

Advertising Expense 11,000 600 11,600 Insurance Expense 10,000 10,000

Depreciation Expense 24,000 21,000

12,000

Bad‐Debt Expense 4,000 10,000 14,000

31‐Dec

100,000

Sales Revenue 30‐Nov 1,100,000 8‐Dec 50,000

30‐Nov 31‐Dec

Salaries Expense 244,000 22,500

31‐Dec

266,500

adj‐c 31‐Dec

adj‐f 31‐Dec

31‐Dec

6‐Dec adj‐e

Treasury Stock 100,000

31‐Dec 1,150,000

30‐Nov adj‐a

30‐Nov 30‐Dec

30‐Nov

Common Stock, Paid‐in Capital in excess of Par

45,000

Interest Expense 50,000 50,000

Tax Expense 18,750 18,750

Part 4: Income Statement

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001 WONDER COMPANY Income Statement For the Year Ended 12/31/2009

Net Sales Cost of Goods Sold Gross Profit Operating Expenses Advertising Expense Utilities Expense Supplies Expense Insurance Expense Depreciation Expense Bad‐Debt Expense Salaries Expense Total Expenses Income from Operations Other Revenues & Gains: Investment Revenue Other Expenses & Losses: Investment Revenue Income from Continuing Operations Before Taxes Income Tax Net Income

$ 1,150,000 674,000 476,000 $ 11,600 24,000 12,000 10,000 45,000 14,000 266,500 383,100 92,900 $ 19,000 $ 50,000 61,900 18,570 $ 43,330

Part 4: Retained Earnings Statement

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001 WONDER COMPANY Retained Earnings Statement For the Year Ended 12/31/2009

Balance, January 1, as reportec Add: Net Income Less: Cash Dividends Balance, December 31

$ 213,000 43,330 256,330 $ 20,000 $ 236,330

Part 1: Balance Sheet

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001 WONDER COMPANY Balance Sheet For the Year Ended 12/31/2009 Assets

Current Assets Cash Recievables (net) Supplies Inventory Prepaid Insurance Total Current Assets Long‐Term Investments Stock Investment PPE (net of Accumulated Depreciation) Other Long‐Term Assets Goodwill Total Assets

$ 250,900 151,000 3,000 176,500 9,000 590,400 230,000 1,735,000 250,000 $ 2,805,400 Liabilities & Stockholders' Equity

Liabilities Current Liabilities Accounts Payable Unearned Revenue Dividends Payable Interest Payable Tax Payable Total Current Liabilities Long‐Time Liabilities Bonds Payable Total Liabilities Shareholders' Equity Common Stock Common Stock Common Stock Common Stock Total Shareholder's Equity

$ 130,500 30,000 20,000 50,000 18,570 $ 249,070 1,000,000 $ 1,249,070 220,000 1,200,000 236,330 (100,000) $ 1,556,330

Part 5: General Journal (Closing)

Michael Lawson (51) & Yanqiu Luo (29)‐ ACCT615_001

General Journal (Closing) Date 2009 31‐Dec

Account Title & Explanation

1,150,000 19,000 1,169,000

1,125,670 11,600 24,000 12,000 10,000 266,500 50,000 45,000 14,000 674,000 18,570

Close Income Summary Accounts

Income Summary Retained Earnings (c)

Credit

Close Expense Accounts

Income Summary Advertising Expense Utilities Expense Supplies Expense Insurance Expense Salaries Expense Interest Expense Depreciation Expense Bad‐Debt Expense Cost of Goods Sold Tax Expense (b) 31‐Dec

Debit

Close Revenue Accounts

Sales Revenue Investment Revenue Income Summary (a) 31‐Dec

Ref

43,330 43,330

Part 2- Company Analysis Horizontal Analysis Within the overall Horizontal Analysis of both Coca-Cola and PepsiCo it was interesting to look at the overall affect the Recession has had on both companies.

From years 2007 to 2008 many of the numbers were in the negative showing losses in equity, liabilities, and assets. Much of the losses for both companies came in the investment category, long term and short term. For PepsiCo their short term investments took the largest hit with a 86% decline from year to year. Coca-Cola had the same result with their investments, seeing high losses from most of their investment categories.

The income statement showed a lot of what is happening to the two companies.

Even though net revenue was up (Coca-Cola 11%, PepsiCo 10%) net income was down (Coca-Cola -3%, PepsiCo -9%). For Coca-Cola its biggest loser came in equity income as well as other incomes. Even though this was the case they still had a positive operating income. PepsiCo however did not have a positive operating income and had considerable loses in bottling equity income, 33%.

The biggest result of the financial crisis can be seen in the Shareholders Equity report, where both companies showed considerable losses throughout the report.

Comprehensive Income for both companies was hit hard with triple digit losses.

Vertical Analysis Within the Vertical Analysis of both companies it was easy to see the change from year to year of distribution of equity and liabilities. For PepsiCo there was a drastic difference between 2007 and 2008. Liabilities went from 50% to 66%, while shareholder equity went from 50% to 34%. Coco-Cola seemed to be more sheltered from this change with only a 1% increase in Liabilities.

When you look at the income statements PepsiCo is trending up in cost of sales, 1% per year, while down in net income, 2% per year. Coca-Cola in 2007 and 2008 had increased their cost of goods sold however only in 2008 had their net income declined by 3%. Gross profit for PepsiCo seems to be decreasing, while CocaCola is within 1% change during all three years of data.

Ratio Analysis I.

Price-Earnings Ratios

A. Profit Margin Ratio = Net Income Net Sales a) The Coca-Cola Company (2008) Profit Margin Ratio = 5,807 m 31,944 m b) The PepsiCo, Inc (2008)

= 18.2%

Profit Margin Ratio = 5,142 m = 11.9% 43,251m The Coco-Cola has a higher profit margin ratio which suggests its favorable return on each dollar of sales.

B. Asset Turnover Ratio =

Net Sales .

Average Total Assets a) The Coca-Cola Company (2008) Asset Turnover Ratio = 31,944 m = 0.76 times (40,519 m+43,269 m)/2 b) The PepsiCo, Inc (2008) Asset Turnover Ratio =

43,251 m = 1.22 times (35,994 m+34,628 m)/2 The PepsiCo has a higher asset turnover ratio which suggests its efficient use of its assets to generate revenues.

C. Return on Assets =

Net Income .

Average Total Assets a) The Coca-Cola Company (2008)

ROA = 5,807 m = 13.9% (40,519 m+43,269 m)/2 b) The PepsiCo, Inc (2008) = 14.6% ROA = 5,142 m (35,994 m+34,628 m)/2 The PepsiCo has a higher return on assets which suggests its favorable efficiency it uses the assets to generate profit.

D. Payout Ratio = Cash Dividends Declared on Common Stock Net Income a) The Coca-Cola Company (2008)

Payout Ratio = 3,521 m = 60.6% 5,807 m b) The PepsiCo, Inc (2008) Payout Ratio = 2,589 m = 50.4% 5,142 m The PepsiCo has a higher payout ratio which suggests its higher percentage of earnings distributed in the form of cash dividends.

II. Liquidity Ratios A. Current Ratio = Current Assets .

Current Liabilities a) The Coca-Cola Company (2008) Current Ratio = 12,176 m= 0.94:1 12,988 m b) The PepsiCo, Inc (2008) Current Ratio = 10,806 m = 1.23:1 8,787 m The PepsiCo has a higher current ratio which suggests it has stronger ability in shortterm debt-paying.

B. Inventory Turnover Ratio = Cost of Goods Sold Average Inventory a) The Coca-Cola Company (2008) Inventory Turnover Ratio = 11,347 m = 5.2 times (2,187 m+2,220 m)/2 b) The PepsiCo, Inc (2008) = 8.5 times Inventory Turnover Ratio = 20,351 m (2,522 m+2,290 m)/2 The PepsiCo has a higher inventory turnover ratio which suggests its inventory is more liquid.

C. Days in Inventory = 365 days .

Inventory Turnover Ratio a) The Coca-Cola Company (2008) Days in Inventory = 365 = 71 days 5.2 b) The PepsiCo, Inc (2008) Days in Inventory = 365 = 44 days 8.5 The PepsiCo has a lower value which suggests it needs less time to convert its

average level of inventory into cash.

III. Solvency Ratios A. Debt to Total Assets Ratio= Total Liabilities a)

Total Assets The Coca-Cola Company (2008) Debt to Total Assets Ratio= 12,988 m+2,781 m+3,401 m = 47.3% 40,519 m

b) The PepsiCo, Inc (2008) Debt to Total Assets Ratio= 23,888 m = 66.4% 35,994 m The PepsiCo has a higher debt to total assets ratio which suggests it has greater risk to repay debt.

B. Times Interested Earned= NI before Interest Expense & Income Tax Interest Expense a) The Coca-Cola Company (2008) Times Interested Earned= 7,439 m-438 m = 16 times 438 m b) The PepsiCo, Inc (2008) Debt to Total Assets Ratio= 7,021 m-329 m = 20 times 329 m The PepsiCo has higher times interested earned ratio which suggests it has greater ability to meet interest payments as they come due.