Oh so for example, if you got 100% on the 1st quiz, you get your marks back, You got

100%. You don't

even have to show up for the next one Yeah, whatever is the highest mark. Like let's say you got a 97
on the next on the 1st quiz when your marks go up tomorrow and you're like, I don't really feel like
writing a quiz. I don't want to study for it. Don't show up and you'll get a 0 But I'll take the highest
mark of the two quizzes and you'll get that mark for both quizzes Does that make sense? Yeah, I just
So that's what we'll do. So like I said, your mark should be up tomorrow ish. I have them sched
Upload automatically at 9:00 AM, but I'm traveling at 9:00 AM, so if they're not up at 9:00 then just
know that they're gonna be up as soon as they land and we'll go from there Secondly, second thing
that I want to talk about is next week, So next week I'm not here if you'll see on the schedule, I'm at
a conference all week. And So what I'm going to do is Self study week. So I'm going to upload a few
cases. It actually works really well for this kind of content. I'm going to upload a few cases. You have
to read the cases, provide a response. Your ICA will basically be your response to the the case, if you
will Now, if you are paying attention to our agenda or schedule, it says that we're supposed to have a
quiz on the 13th. That's obviously going to be pushed back a week because we did have to push our
first quiz back a week. So everything kind of gets shoveled down. So your quiz #2 Will not be until
March 20th. Was number 2 March 20 Those are my three big announcements Number one, the quiz
marks will come out tomorrow. Number two, I'm not here this week. Next week we'll be sorry, not
here next week. Next week will be a self study week week Quizzes getting quiz #2 is getting bumped
back week. Oh, and #4 your individual projects are up and you can go through and peruse on what
those are and it's pretty like I watered it down quite a bit just because We are running out of time in
the semester, so it should probably take you about four to five hours to do, but it was probably about
18 to 20 hours in its original form. But after that first quiz came back, I was like, I really have to stop
making things so hard because they're going to think I'm a jerk We're not really that much of A
dream So just a little bit. OK, so we're going to dive and I'll summarize everything that I just said in a
announcement when I get home tonight before I take off So What we're doing in this next part is we
basically have done all the theory that we're going to do, and now we're going to talk about case
writing. And case writing is super important because it's essentially a how, if you go into your CPA,
how you're going to be evaluated In the CPA program, you're essentially evaluated one or two ways
by multiple choice questions or by writing cases. And it's about 97030 case valuation versus multiple
choice. So case writing is is there's even like a lot of companies like Deloitte Are doing case writing
for job interviews now. So knowing how to approach a case, knowing how to even start to solve
business case is super important. The method that we're using here is the same method that they
use in the CPA program. It's actually the same method that I use at my work. For any problem that
we encounter, we break it down To its very simplistic form. So what we're gonna be talking about
next is not just AU of L managerial accounting tactic. It's a real world tactic and it's also ACPA tax It
has multiple uses not just for this classroom, but in the real world as well Case writing is tough. Case
writing is tough. At the end of the day, case writing boils down to providing value for your client, your
customer, the engagement you're on. Essentially, your customers here, they want to be here, and
your job is to bridge the gap between those two places. That's really all Case writing is, but it's a little
more nuanced and a little more difficult than just that. That's it and it's most simplistic form. And
that's what we're going to talk about today, how you even approach it. So there are four things that
as soon as you sit down to write a case, whether it's in this classroom, whether it's in the CPA
program My brother has a consulting business. He does the exact same thing anytime he meets the
new client. He asked 4 things and these four things are consistent every single time. Who are you? So
who are you is essentially what is the hat that you're wearing? What is the lens that you're looking at
this case through you're Approach a case very differently if you're a frontline accountant who's been
doing bank wrecks for the last two years versus if you're the CEO who's making high level decisions.
So who are you is super important. It allows you to understand how you're seeing the case, who your
audience is going to be And once you, it will always be given to you. You're never going to have to
figure it out. It'll always say something like you student A controller for an oil and gas company.
Something like that. It allows you to frame the case through your eyes That one's probably not the
least important abuse for the next thing is going to be who are your users? So your users are going to
be anyone who is going to be impacted by the recommendation that you provide out of every case
that we write and if every case that you ever do There's always going to be something on your end
that's going to be called the recommendation, and your recommendation is going to be how do we
solve the problem that they're facing? Every single case has a recommendation as the end result Your
individual project, you want to have a recommendation at the end of it. Essentially your individual
project is someone wants to invest a large sum of money. You have to do an analysis and tell them
how they should invest their money. And that's what the individual project is. But at the end of the
day, every consultant, that's all they do is provide recommendations. That's really all they do They try
to tell you how to get to where you want to go, so your users are going to Who are impacted by the
recommendation now you can make this as broad as you want but for the most part just try to keep
it to people who are immediate Lee affected so for example if you're recommending that they
Because of the high tariffs, then you're not going to be able to operate with 25% added on to
everything. You could say that the users are going to be all of your employees and your US offices. It's
going to be your tax accountants A bunch of people and there's going to be tax implications, so
things like that Who are your users? The people who are going to be impacted by the
recommendation that you make? This is one of the more important things, one of their objectives
We call these US OS User Strategic objectives. Essentially, if you've identified who are your users are,
who are the important people in this case, your Usos are going to be Why are they? Why do they
care? What are they trying to do? Why are they getting out of bed every morning? What do they care
about? What's their mandate? Now, if, for example, you're talking about that last example that we
were talking about the closing of a branch in the US Your users would be the manager of the US
branch. Their strategic objectives would be to keep the branch open. So like, what is their? What is
their view on this issue? What do they want to happen? You're not necessarily going to be able to
make everyone happy, but you have to at least understand what everyone cares about In this
situation, if Bit of a hack here. If you have a for profit company, a company that exists to make
money, one of their strategic objectives always underline, underline, underline always is profit
maximization No one who runs a for profit company ever gets up, wakes up in the morning and
thinks, I hope we don't make any money today. No one says that, so it's not realistic. Everyone wants
to maximize their earning potential. So the objective, the strategic objective of a for profit company
is always going to be Profit maximization. If it is a not-for-profit, it's usually going to be something like
Made of the organization, affording the goals of the organization. So it's a cost reduction, something
like that So also it's bolded there at the bottom for a reason. Your recommendation? When you go to
make a recommendation, it always Always has to tie back to your user strategic objectives. If your
user strategic objectives is to maximize profitability and you make a recommendation, that is going
to end Company money? Then that's not a great recommendation. You can put together the most
well thought out, well researched, well analyzed recommendation, but if it's not what the users care
about, then it doesn't carry any value at all Like even that kind of an example Play. Probably last
summer my wife had the kids and they went out to the mall and she called me and she was like, your
kids are terrible and they're misbehavior and she felt your kids, my kids She said they're
misbehaving. I'm stressed out. It's been such a long day. Please, please Have something on the table
when we get home to eat Cool. I don't like cooking. So I was like, you know what I'm going to do? I'm
going to do this one better. I'm going to clean the whole house. And that's what I did. I like cleaning.
And so instead of making something to eat, I clean the whole house. And I did a great job. Like I
cleaned it from head to toe. It was beautiful And so then my wife came home and she was frazzled
and she was exhausted. And she said, what's for lunch? And I said, well, hold on a second I said no,
but I clean the house. She said a lot of swear words and she said I'll be back in two hours and she just
gave me the kids and left. And so that's an example of I thought I was doing something great, but it is
not the user cared about. So it carried no value at all. And that's really what you want to focus on
when you write these cases is even It might not be the most perfect answer. If it solves what the user
cares about, then it's a great answer. It is always a competent response And then finally, the last
pillar that we're going to talk about of the four pillars is what are their requirements? So this is going
to be their ***. We want you to do an MPV calculation on an asset purchase to determine if it's
financially feasible. We want you to create a new org chart that will minimize the moral issues that
exist within the company Something like that asks will always be very directive, meaning you're not
going to have to kind of guess what you're supposed to do. It will say please do bumper, bumper,
bumper bump There will always, always be a ask, otherwise there would never be a case So We're
going to skip this part. We're going to look at our first case. We're going to dive into it. This is a very
shortened version of a case, but take two minutes right now and just read through what we have on
the screen here. Just two minutes and read through what you have on the screen OK, so this is kind
of a very short version of a case, but it essentially kind of creates a scenario, gives you who the major
players are, it gives you what the ask is, it tells you what they care about. And what I want you to do
now is get with a few people around you and I want you to answer the four questions That we just
went through, who are you, who are your users, one of their objectives and what are their
requirements? So grab a few people around you and just answer those four simple questions. It's
currently 617, will go until 6/22. So you have 5 minutes to work through this. Here's all the major
players, here's what they care about. Great. Then we move on to the next section, which is one of
the requirements. So what are the requirements? What were you asked to do? Review the financial
statements and make recommendations exactly So I'm going to get you to, in your groups, take 20
minutes and go through and review the financial statements. But before you do that, I want to walk
through them with you together. So the financial statements are on the slide right after the narrative
And I think in post secondary we spend so much time building the statements and going through and
doing journal entries. And journal entries give us account balances and account balances go in
certain places and they give us our financial statements. And we spend very little time talking about
what does it all mean, what does it all mean, how do we interpret? What we're seeing here, so I just
want to walk through each of the statements, if you haven't done this before, I'll walk through it and
just kind of give you a little bit of a some insight into what you should be looking at. So first of all,
your balance sheet is obviously this is your opening balance, this is your closing balance. Balance
sheet is your numbers At a. Of time, so whether it's December 31st or March 30th, it's kind of that
line in the sand where everything that happened at that point, this is the ending balance, so It's kind
of like your bank balance. When you check it at 6:00 PM tonight, whatever it says, money you have in
your account, that's what your balance is. Same thing here. Balance sheet is at a. Of time, not for a.
Of time. The difference between those things Random statements for the year 2011. For the year
2012, this is at December 31st, 2011. At December 31st, 2012. Now what you're able to do with this
is you're able to see the variance between the two years So when I'm looking at my cash balance in
2011 versus 2012, I can see that my cash balance went down by let's say 1800 dollars, $1700 And
what I'm looking at is, OK, what is, what is that? What does that mean? Does it mean anything?
Sometimes in isolation it means nothing, but it can tell a bigger picture when you start to look at
things I'm gonna look at my short term investments. They went down. So you ask yourself, why
would your short term investments go down? Oh, there were three Short term investments are going
to be things like Gic's or stock investments that you only plan to hold for a. Of 90 days or less. And
why would it go down till they cash them out? Why would I cash them out? Well, I don't know yet,
but I know that I had some investments and now I have less You can go through and look at all these
things. My accounts receivable, This is Money that is owed to me. So it's going to be a sale that has
been made. I simply haven't collected the money yet. And you can see my receivables went way up.
And generally that's a good thing because it means that you made a lot more sales in 2012 than you
did in 2011. Generally means that, but Again, none of these numbers in isolation really mean
anything. It's all about when you start looking at it all together So we're going to scroll through and
it's just generally the same thing, like my notes payable. This is going to be a loan that I took out. My
loan balance was 200,000, now it's 720. That's a lot of money coming in. What did I do with that
money? You don't really know So that's gonna take us to our statement of cash Similar cash flows is
kind of like the Ugly redheaded stepchild that no one really talks about. This is the statement that we
always talk about, the income statement. We always talk about the balance sheet. No one ever talks
about the statement of cash flows. In the real world, your statement of cash flows is probably the
most important of them all. What it does is it tells you how did you spend your cash or what did you
spend your cash on Now this whole statement right here, this whole statement of cash flows, all it
does is explain one thing. What is the difference between this number and this? So it explains that
$1700 movement which is right here They're not changing cash. So it says that your opening balance
was 9000 ties to that over there, 7282 is your closing ties to that over there. The sum of all these
numbers, 17118 dollars. That means I have a lot of money going in, a lot of money coming out. And
this is very typical for a company But this is what they spent their money on. Now what it allows you
to do is it allows you to really dive in and say, OK, you sold Some short term investments, I don't
know if you cash those in and invested them in. Long term investments, I don't know if you cash
those in and spend it on a company party. I have no idea what you did with it, but that very ends of
$28,600 And we found right here If it is a positive number, it means this money that came into your
company. If it is a negative number, it means money that went out the door Positive coming in the
door, Negative going out the door And this is essentially how you spent your money during the year.
It's not a perfect science because you could say, well, let's look at my inventory. My inventory went
way up. Well, I could have spent all of that in cash 72,000 now I If every single transaction I paid for
in cash, I made it by the got an invoice for some of them, but where that would be captured would
be in my account space. So I don't know if it's exactly 572, but it really doesn't matter. We're not
trying to capture every single dollar, we're simply trying to Kind of understand what from a large
scale, what did you spend your money on? So that's a balance sheet. This is a statement of cash
flows. Then we get to our income statements and our income statement, you can see we made way
more sales, almost double their sales. But what we want to do is we want to look at things in terms
of percentages, so What percentage of your sales was your cost of goods sold? The cost of goods
sold is the cost to produce the product. Your sales is how much you sold it for In any line of business,
the bigger the gap between these two numbers, the greater demand for your product. The greater
the demand for your product, the more people are going to be willing to pay for it. The more they're
willing to pay for it, the higher sales are, the lower the difference between this is. There should be a
line here that says gross margin, which is just the difference between your sales and your But it
should be proportional and you can crunch the mouth on that and figure out what percentage,
what's your gross margin percentage in 2011? What is it in 2012? My other expenses, my sales
increased by 50%. I'd expect my other expenses to increase by 50% and probably less because
there's some efficiencies that I can find So you want to kind of look at these and kind of look at them
all from a racial perspective and determine are we managing the business better or worse. And the
thing about the income statement is the income statement is for a. Of time. So let's just pretend it's
January 1st to December 31st, 2011, January 1st December 31st, 2012 Your statement of cash flows
is also for a. Of time for one calendar year and that calendar and that this number here ties back to
The variance or the money that you make or I guess lose your net income, this ties right down to
your equity. And this number right here should be the exact difference between your opening and
closing equity. Equity is just a value in your business after your assets are sold and your liabilities Paid
off from a book perspective What that means is basically, assuming that your accounts payable,
you're gonna pay exactly 324,000, assuming that your inventory is worth exactly that number. That's
what's called a book perspective. From a book perspective, this is what your company was worth if
you sold all your assets, paid off all your liabilities Equity is what it's worth today So that's kind of like
a high level synopsis. It's currently 630, let's say 635, let's go until 655. What I want you to do is just
do a qualitative and a quantitative analysis, lining up with exactly what you were asked to do, which
was review the financial statements and make Three recommendations for improvement. Remember
your recommendations have to tie back to the users and what they care about. So grab a few people
and 22 minutes you have 21 How to cook in eggs? No, it's not a, it's a Oh, I just called We'll start with
the move from your From your sales in 2011 to your sales in 2012. Did anyone do the math on that?
Yeah Absolutely nothing cost a good soul. What would increase? 74 OK. So now we can start to get a
little bit of a picture. So it looks like we're on the wrong side of 4% where our sales increase Our cost
of goods increased by even more. Now how does that happen? Well, maybe we offer a promotion or
maybe we offer to sale. Maybe our suppliers kind of got fed up so they started charging us more. You
don't really know why, but we can start to see Then we get into our other expenses It's increased by
100 112 So now we're getting into some numbers that don't make a whole lot of sense. Someone
correct me if that. Is it 112? 100 and 2012, OK Now we're starting to get into a little bit of weirdness
because if it costs you, like think of other expenses like things like advertising, things like Meals and
entertainment and all those sort of miscellaneous things. As your sales get larger, your other
expenses should probably follow suit. And they're actually growing by a lot more. We don't really
know why Just by looking at the numbers, but when we look at the narrative, it says something like
They're not satisfactory, blah blah blah. Oh, the company Opens launched an extensive advertising
campaign. So that's probably what they're alluding to, launch an extensive advertising campaign. And
again, OK, OK, maybe that's fine. Maybe it was necessary, maybe it's not Our depreciation had
jumped up by a massive amount. It went up by like 800% 500 591 now 519 OK, so Now, immediately
you would look at that in your guts, you're going to say that feels like there's a problem, but Good
appreciation is a function of Through our fixed assets. So you would expect your fixed assets to
increase which they did. And you might say, well hold on a second, the fixed assets only increase by
like 200 and something percent your appreciation increased by 500. Well if they chose the declining
balance method, it usually records Appreciation in the front, so that in and of itself, I'm not worried
about that. I'm actually OK with that No concerns there We get you. This is math. This is math plus
sign Expense increased by like 270% Oh, what did you do? Sorry, you're right. What did you do? And
this I'm looking at it and saying, OK, we obviously the only way your interest expense increases is if
you borrow money. So we're going to ask ourselves did we borrow any money? We're going to go to
our notes payable We're cool, yeah, we borrow money, so that checks also look at this year, our long
term debt checks So we borrowed a lot more money. We actually tripled our debt here, long term
debt and we more than tripled it under notes payable. So what I would, I would expect that sort of
an increase. I'm not overly concerned with that at least from a math perspective. Now I'm going to
start questioning You borrowed a ton of money. You increase sales, but your cost increased by even
more. Your other expenses increased by an exorbitant amount. You spent a lot of money on some
fixed assets. Who's making these decisions? And then you want to ask yourself, OK, so then we get
into our taxes, whatever, blah blah, blah. Doesn't this is all all this is around. So this is what we care
about here Just care about how what do we what do we do with our money? Then we're gonna go
over here and look at our cash flow statement and we're gonna look at what did we spend our
money on so First things first we spent $700,000 on our fixed assets yes. And we go over here and
we say fixed assets do they increase they The increase by like whatever 600,000 says we spent 700,
the rest is going to be depreciation. Cool. I'm fine with all that. So this is good. I'm fine with that.
Short term investments, we had to sell off some of those, whatever, doesn't matter Changing no
payable we had to borrow a lot of money. Changing long term debt, we had to borrow a lot of money
Payment of cash dividends So if I was Imagine you have a sibling and your sibling calls you and they
say, listen, really down on my luck. I need to borrow some money just to like pay my and Max bill.
Otherwise the heat's going to get cut off and my kids and I are going to be frozen. And then you see
on their Instagram where they went out With Chris Steakhouse, with the money that they lent you,
you would probably be pretty ******. And that's when a company borrows money and pays
dividends. The banks hate it. Hate it so much so that all of the loans that we have with the bank say
that if you pay any cash dividends with the money that you borrowed from us, we will immediately
Cancel your loans and require you to pay back the entire amount in full Nobody likes it when you
borrow money to pay off other people. It's just it's The reason that we pay dividends or we try not to
stop paying dividends is that it will crush your stock price if you stop paying dividends for some
reason, because it's a signal that your company is struggling. So that's why companies like World
Bank who have increased their dividends every single year for the last like 38 years or something like
that That's why people put a lot of value in that stock because it's a sign of good times and and
positive things are happening. So this would be probably my first major concern right here, paying off
dividends, first major concern My next major concern would be over here What are we doing with
these other expenses? Why are we spending so much money? There's probably we We essentially
had $170,000 shift where we made 90,000 and then we lost 95 or $180,000 **** For the for the
negative, so maybe pull back on some of the extensive advertising that we're doing because more
than doubling it didn't need to happen and it clearly didn't help your top line results We move over
to the balance sheet and the balance sheet is kind of just reconfirms or confirms a lot of the things
that we established the I guess let me see, going over here, what else do we spend our money on?
No, no, no, we've talked about all this. All this up here is kind of irrelevant. All this really explains is
just the movement of your current asset accounts It just explains those things so I have outlined here
2 issues that I see. I see you're borrowing money to pay off dividends. You have an extensive
advertising campaign, but let's go. There's one other thing that I wanted to highlight, and it is this
This one seems OK. You look at your accounts payable ideally In a perfect world, your accounts
payable in their accounts receivable should be fairly consistent because all these two numbers
represent is time If there was no if everyone paid cash for everything, you would be have no
accounts payable and you would have no accounts receivable. So the fact of the matter is that it
looks like our accounts receivable here is double your accounts payable, double your accounts
receivable. I'm OK with that It's kind of a little bit. I would like to see us collect more of this, but it's
not a huge issue. So all the all this takes to get this down is a couple phone calls. So really how
people hate money, they do all this. Sure, we'll be there next week But this is the one that scares me
the most So we're inventory almost doubled, it's up to 1.2 million. But there is a cost to how is that
much inventory. We had $715,000 worth of inventory when we had 303.4 million in sales, we have
1.2 million Our inventory is going up even though our and our sales are going up, but those don't
necessarily or shouldn't necessarily be hand in hand. You don't need a warehouse full of of Tablets
when you're you've got enough money So the reason that they probably bought a lot of inventory is
they were anticipating a massive increase in sales because of their expensive advertising campaign.
That didn't really happen. So they're left with a lot more inventory than they would like to, and now
they probably have to discount that inventory to get it out Of the warehouse, which is why this
number is lower than this number. Again, we don't exactly know what's happening, but that's kind of
the story that is happening with these numbers. Now, if I had to ask you, what are the three things
that you came up with that you would recommend someone tell me? What's one thing that they
would recommend? Review their costs Good Salt. I mean their margins basically like they are
spending more in Kosovo consoles and the other expenses and Why is the reason of that they are
becoming more unofficial than last year. I mean you have more data. You could maybe go into that
and recommend you are spending more on this and that So you're right, but you're going to want to
use different language because They obviously know that they have a problem with their cost of
goods sold in their sales. They can figure that out with the the calculator app on their phone. So and
again, what you want to tell them is things that they don't know. So to say you could review your cost
of goods sold, you probably want to use different language and say Stop buying so much inventory,
or stop buying so much you know, watch Pricing your inventory or manager supplier contracts better
so your cost of goods don't get out of out of control. The recommendations you want to give need to
be direct and they need to be black or white. They don't want you don't want them to be great. You
could do this, not I know what I could do. Tell me what I need to do So he's very almost aggressive.
Don't be like you ****** terrible. Like it doesn't have to be hurtful, but it does have to be strong
word. So again, I'll go He has a ones a consulting business and he had a client who She's a really good
painter and she just wanted to paint and that's all she wanted to do is paint. She didn't want to
worry about the website, she want to worry about shipping and managing the customer list and
advertising the whole night. So he said here's what you should do. You should Create a website. And
she was very aggressive and she was like, yeah, no **** I know I should create a website. Tell me, like
tell me something that I can actually action and make my business better. So telling them the obvious
things are not always the best things, and you can just change that by little shifts in your language
OK, what's one other thing that they should do? Yeah And finding the new way of criticizing which
decrease the Along with that, you still can be fixed, so use a different type of Absolutely, yeah. You
don't need an extensive advertising campaign where you're you're more than doubling your other
expenses. Maybe you could say something like maybe go with a viral Instagram campaign or a tip top
campaign or something like that Out of the Youtubers and something we start approaching them.
Yeah. And do something. So which is less expensive? Yeah. And more sales? Absolutely. Yeah, that's
perfect. OK, so here's the things that I had on my list. I'll just show you again, it's not an extensive list
So I'm not sure if you So control your inventory spending. Now again, remember it has to tie back to
the users and what do they care about? So bank cares about this, stockholders care about this. Why?
Because it's going to It's tying up money that could be paid for interest or spending money that
belong That causes the stock price to decrease because you just are sitting on inventory pull back on
extend Advertising campaign which was mentioned get Payables If we go back and look at this
Remember, 1 of the big issues was our suppliers. They're not getting their money. Suppliers are
represented right here Money that you owe. We've got more than enough money to cover up on
this. All we have to do is just pick up the phone and call some of our customers that owe us money,
funnel that money right to our suppliers. We collect the longer that this The more that this number
grows and grows, and the longer that people owe us money, when someone owes you money, the
longer they owe you money, the less like you're gonna get that money. So we wanna be diligent. We
wanna collect right away. We want to ensure that this doesn't get too big. The lower the better for
your receivables And we want to use that to pay down our suppliers because then it keeps our
suppliers happy, solves that issue. It gives us cash in, in the in our bank. So all of that can be, it solves
like multiple, multiple issues And again, when you're giving your recommendations, always try to tie
it back somehow. To what? Can't, and it's not a good recommendation OK, Are we good with that?
Everything we just did there because we're going to jump in and do enough. We're going to do
probably do about 8 cases over the next three classes. So we're going to move to our next case. This
is Small Businessman Magazine. If anyone watches the office, this will be very familiar. So I just want
you to take 5 minutes and this is But just work with the people around you want you to answer again
these same 4 questions. But read the case and tell me who you are. What do they care about? What
are they asking you to do? If you want to know where the case is, it's on Moodle and you should be
able to grab it and find it over there It's called SVM Magazine Active financial reporting. Yeah, that's
great Whether the strategic objective? To prepare a codified idea is bad better reflect magazine
financial Despite distracting To provide action number Reconciliation of growth control Income
statement We are just looking for them And then strategic objective is going to Use a proper
accounting Every month you need to reverse it and then do the adjusting entry That's good. Same
with rent expense. It was just put at the beginning of the month everything Yeah, that's good So I
mean recommendation is gonna be done, they counted as well done, right? You have experienced
before, then started University No, I I have a diploma and I'm just doing Another two minutes and
we'll go from there Yeah Is it easy in work in company and I don't have experience in accounting? It's
not that the way we do standard and we it's not the same outside I don't believe that I find a job Pay
this money Yeah OK, let's talk about this. So same 4 questions. Who are we? Team Here we go, Jim,
And who are our users? Michael Scott. Yeah, Michael Scott. I heard a small business making brother
management and he really, really wanted to get Over not overprotective, he really wanted to dive
deep you could say there's one other user which is the government now this was a little bit obscure
but I will tell you that everything that's in a case is there for a reason so When you read the case,
there is a single line in there right at the very end of the first page that says The only good thing is
that because we lost money, we did not have to pay the 30% income corporate tax rate so Should
jump out in your head and you should think, I don't know why that's there, but I'm gonna put in my
back pocket and keep it and not forget it. Because chances are We're going to go through, we're
going to make the adjustments. We're not going to lose money. We're actually going to make money
and then we will have to pay the corporate tax rate Just remember, you don't pay taxes when you
lose money. You do pay taxes when you make money OK. So I wouldn't necessarily put government
on that list, but I just put it there to be extensive Now what does Michael Caribou? Michael cares
about Profitability, success of the business. There also isn't mentioned there that they didn't make
any money in their first month. Then it's crushing employee morale and he needs to figure out a way
to fix this. So Michael cares about profitability. I just put success in the business just to show you that
you don't have to put profitability every time It's implied in how you say that his brother cares about
success of the business and probably job security because of any time you're hiring an accountant
and they're looking things up on YouTube on how to do them, chances are they're firing is not far
away. And what would the government care about if you put that? Just getting the government
always When the requirements were correct in the accounting errors and preparing accurate set of
financial statements. Now they did give you A sort of unaudited set of financial statements. And this
is kind of where cases can take many different turns. Like what you're going to be doing here is going
back to old school debits and credits and looking at what needs to be changed and looking at where
it's at Versus where it needs to be and making a corresponding journal entry to fix it. So cases will
always look and feel different and I'm going to try to expose you to as many different types of cases
as possible. What I want you to do now is with the same people that's around you, let's take 30
minutes because this will take some time to go through and not just make the correcting entries, but
to Prepare the accurate set of financial statements and if I can give you some advice on how to
prepare them, what I would do would be something like this So this is going to be like cash They are
inventory, et cetera. And then this is going to be your proper, proper whatever Proper financial
statements and it's essentially going to be this This plus this equals this. That's all that it is So this is
what's called the three tier system, but essentially our three column systems, what you're doing and
you can just list kind of like a balance sheet is typically One assets and liabilities and equity over here
or assets and then liabilities and equity down. Just put it all in a single column including your income
statement and that way you can make changes and you can have your proper financial statements
for Those changes So again, let's go until 755. Feel free to work with people around you or just work
by yourself. But what we're going to be doing is making the correcting entries, making the updated
statements, and providing some guidance for Michael Today counting errors and then prepare an
accurate set of financial statements. OK, so here's the first required. So when you're going through
and you're doing a quantitative analysis and a quantitative analysis is essentially anything Where
numbers are involved. So this is a quantitative analysis. You always want to start with a purpose and
end with a conclusion. And it doesn't have to be any more than what you see right here. What it
does is it allows you to frame the numbers because oftentimes when people are looking at this,
there's just a whole cornucopia of numbers spread All over Excel and it's unorganized. So the
purpose here is to address the three issues and investigate for any accounting errors. So the first one
had to do with the subscription revenue. We recognized it all up front when we should have only
recognized one month One you can see here, one month divided by 12 months is 8.3 percent. 8.3% *
85,000 is $7083. Now here's what we should have in this account if we jump back 2 OK, so if we look
at our statements, we have So under unearned revenue, where is it unearned revenue? So we have
$85,000 in unearned revenue. Essentially we're not recognizing any of the revenue that we have
earned. So the journal entry that we're going to want to record is a Is a debit to under revenue
because they're up under our unearned revenue which is a liability is overstated. So it's naturally in
the credit position when we want to lower it, we're going to debit it and we're going to credit our
subscription revenue. Essentially we have we haven't recognized any revenue relating to the First
month. So this is going to increase our top line revenue on our income statement. This is going to
decrease our liability on our balance sheet and it's all going to balance Next issue was the rent
payable. Now there's not a huge amount of support here, but it says in the question It says The rent
for SBM is $2500 a month. I was not sure how to record this transaction, so I figured that I would be
proactive and record the entire year's worth of expense all at once. I didn't pay the full year's rent, so
I recorded it as a current liability. So there's a huge problem there Essentially what we've done is
we've overstated the expense and expenses. Naturally in a debit position, if we want to lower that
expense, we are going to credit it. And he said that he put it all into a payable account. A payable
account is not in a credit position. If we want to lower it, we have to debit it. Now how do we get?
#27,500 well in our account You would go over here and see accounts payable 30,000. So we go like
this equals 30,000 / 12 Equals 2500. So what we should have here is 2500. What we actually have
there is 30,000. We have to take the difference, we have to adjust the difference. So here's where we
want to be, here's where we are. We're going to have to subtract 27,500 from our accounts payable
and that allows us to get The 1st 2 entries Then the third entry states. I have no idea what straight
line depreciation is. However, I know that you wanted to use the straight line method so I did the
best I could. I managed to find the declining balance method and figured that was close enough I
know the equipment had a useful life of five years and had $0.00 residual value, so I used a 40%
depreciation rate when calculating depreciation. Now 40% is the correct rate that you would use for
a five year useful life But you use declining method instead of straight line. So what we need to do is
we need to take the variance between what it should have been, what it actually was, and take the
difference. Oops Essentially, our depreciation should have been 12150 dollars, $75,000 cost divided
by 5 years is $15,000 per year. $15,000 per year divided by 12 months equals one month worth of
depression We actually had recorded $30,000 for depreciation Is 40% of at the 40% rate now we're
essentially we're way too high. When you record depreciation, you debit depreciation expense,
credit accumulation, accumulated depreciation. Those two numbers are those two accounts always
go hand in hand So we've overstated our expense, we've understated our asset and as a result, we
have to, yeah You have to flip it. So that's what we do with this entry, this correcting entry. And then
if you go through and you do the math Let me get this here. I'm going to upload this book, but
essentially step one, Step 2 is basically plugging in all of the adjustments that we've made. So I've
corresponded the numbers here to the different journal entries and all I've done is made Positive
numbers, negative debits, negative numbers, credits. And then Step 3 is to sort of make it work over
here. So this is what I was talking about. Here's your unaudited numbers. Here's your adjustments,
Here's your actual numbers And when we go through and do the math on this, we're essentially
raising our revenue, recognizing that one month worth of revenue. We're reducing our expenses in
two different situations and we initially had a loss 17,000 now we have a gain of 30. I'm sorry, we
initially had a loss of 17. We now have a gain of 46. Now if we have a gain of 46, Michael clearly
stated at least we didn't have to pay the 30% corporate tax rate. So this is not Implicitly stated, but
you should know When you have a gain or when you make money, when you make profit, you're
gonna have to pay taxes on it. So even though there were three issues you had to adjust, there were
four entries that needed to be made. That's why this part is tricky and most people got out For this
4th issue. So then you end up with and that that calculation that I performed there is simply 30%,
yeah Scroll down here. So I just rounded it. It's pretty close 4633, which is our before tax profit times
30% is 13900. How do we record that we're going to debit tax expense, credit, tax payable? I would
also accept a debit to tax Credit to cash, assuming that you're paying your taxes right on time Most of
the times you would put into a payable account though And what we end up with is A balance sheet
that looks like this So our total assets Sorry, our current assets are 95,000. We've adjusted our
accumulated appreciation, so What this, this equipment and accumulated depreciation. Again, those
two accounts, you're always seeing them together on the balance sheet. This is saying that we after
one month we spent $75,000 on a piece of equipment, it's now worth 45,000 after one month.
That's obviously incorrect What it should say is we spent $75,000 on a piece of equipment. After one
month it's worth 73,000 Of course, with time everything goes down in value. So we just wanted to
recognize it's not depreciating that that Under this method, this asset will be fully depreciated worth
nothing like by the third month of operation. So we've just sort of slowed that down a little bit and
accurately represented that The current liabilities look like this with adjustments to our income tax
payable or rent payable and our unearned revenue. Current liabilities of $140,483 and note payable
is 5000 Our common shares are 5000 and a retained earnings is 32,433. Now where does that
number come from? That number comes from all the way, right? Here it is, our net income. And
because this is our first year, our first month of operations, we have no retained earnings to start
with. Whatever our net income is in that first month is going to be our retained earnings. Next month
it'll be 32433 plus whatever we made in February For this month #2 So that's basically everything for
our case number two, yeah 24,000 Do they upset each other perfectly? OK. OK. So this must have
just been just slightly, slightly different. You can just make those adjustments. So hold on, let's go
back and make these adjustments here in real time. So we have no accounts receivable. Sorry, I can't
bring this up right now Subway OK So what else do I have different? I'll look at it and just adjust it. It's
time to do it on the fly OK, but the the journal entries are fine, the journal lunches are accurate and
so this is an example of how you would go about putting together a case. Now this is just the analysis
part. This is not everything. You would have to put together a recommendation as well And but your
recommendation for this would be pretty straightforward. You would say something along the lines
of let me go back over here My conclusion, the net income was understated and results in SMB
realizing a $32,000 profit and this kind of shows how I got that. And your your overall
recommendation would be something along. I don't have anything written here just because this was
on the analysis part, but your overall recommendation would be something along the lines of You
should probably hire a properly trained account And you, all these other issues go away. Your morale
goes away because you're not profitable. The morale is low based off of incorrect numbers. The
business is now successful. It was Potentially unsuccessful because of incorrect numbers. Brother
probably doesn't have a job So you can only do so much and the government gets their taxes. Life is
good. It is now a profitable business So that's what you're you want to try to address as many of the
USO's and your recommendation as you can. Again, one thing you'll notice there is zero complete
sentences in any of this, just bullet points, bullet points, bullet points and keep it that way. It just
saves you so much time I would rather you spend time explaining your calculations then putting in a
narrative around what's happening with the with the situation OK, so the ICA that we're going to do
for this week, because I'm not here next week, I said I put it on a Dropbox and so you can download
your ICA #5 tonight is going to be due next Wednesday night at midnight Do you have a full week to
do it? And it's essentially reading a case and filling in those four basic things. Again, what's your role?
Who are your users? Who are your Usos and what it requires? Although this time it's a little bit more
complex and it's I don't wanna say significantly bigger, but it's gonna start to get bigger and bigger
cases when we get to the end, the exam for this course at the end, we're gonna look at like a 5 or 6
page case. It's gonna incorporate a lot of different things. So we're starting small and then we're
gonna get bigger as we become a little bit more confident OK, that's basically it for tonight. Again,
you can Your ICA #5 right now it's already up on Moodle. And make sure that you look for your marks
tomorrow. Like I said, they'll probably upload. They're supposed to upload around 9:00, but if not, I'll
upload them when I when I land Other than that folks, we are done and you are good to go