Question

Imagine you are looking at the Balance Sheets and Income Statements of Company A and Company B. You are also given the following background information on each company:

Company A – An organic bakery specializing in cakes and cupcakes. The bakery sources all of its ingredients from suppliers within a 50 mile radius of the bakery, and typically buys these ingredients on account making payment in 15-20 days. The bakery makes deliveries, which requires 2 vans (owned by the company) that are depreciated over 10 years. The bakery only accepts cash payments from customers. The bakery is a sole proprietorship (no outside investors), and has been able to finance operations solely through sales and the original investment of the owner, with the exception of a $50,000 bank loan that is still outstanding with the bank. The bakery owns the land on which it operates, as well as the building it is in, and uses the land and building as collateral on the bank loan. Due to increased competition in the market, the bakery’s expenses exceeded revenue during the last fiscal year.

Company B – A travel agency selling vacation packages to Italy, Greece, and Turkey. All sales are made on account (on credit) and the company expects full payment within 30 days. The company leases/rents all of its long-term assets, including the office space, computers, and furniture. The company was funded by a small group of investors who purchased stock in the company. The investors are paid a $5000 dividend every year. The travel agency keeps pencils, pens, and paper on hand to help with the day-to-day operations of the business, and buys all these items on credit from an office supply store. The travel agency had a bank loan 5 years ago, but paid that off and has had no debt to the bank since. The company has a net profit margin of 37%.

Based on the information provided above, list 4 differences you would expect to see in the financial statements of Company A and Company B (e.g., an account that may be on Company A’s financial statements that would not be on Company B’s financial statements, or vice versa). Specifically name the account and then document what information from above you used to come to your decision. Use account names that we have discussed in class. You will get 1 point for each correctly identified account (note: there are way more than 4 possible answers). An additional 1 point will be awarded for neatly and completely, yet succinctly, explaining your decision.

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4.

Answer 1

1. Closing Stock (in Company A) . Company A is an organic bakery and thus it has to maintain a stock of cakes and cup cakes it procures from outside. Company B on the other hand is a service supplier who need not maintain any stock of goods.

2. Loan (in Company A) . Company A has a Loan outstanding of $ 50000 in its books of accounts. Company B on the other hand has paid off its loan liabilities in full 5 years ago.

3. Stationery (in Company B). Company B maintains a stock of stationery items like pens, pencils and papers for day to day operations. Company A on the other hand has no such requirement of stationery items.

4. Dividend (in Company B). Company B has maintained a net profit margin of 37 % out of which it has paid dividend of $5000 to its investors. Company A on the other hand is suffering from losses.