ACC 308 Milestone Two - Management Brief
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Feb 20, 2024
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ACC 308 Milestone One
Andrew Munoz
Southern New Hampshire University
This executive summary presents an analysis of Peyton Approved's pro forma financial statements for the year ending December 31, 2018. These projections serve as a foundational blueprint for the company's anticipated expansion over the forthcoming year, utilizing assumptions and hypothetical scenarios to model potential financial outcomes resulting from strategic expansion decisions. Such pro forma statements, while not adhering strictly to Generally Accepted Accounting Principles (GAAP), offer invaluable insights for informational purposes (Bragg, 2021).
It is imperative to acknowledge that these pro forma analyses may not conform to GAAP standards, serving primarily as strategic tools. Peyton Approved's projected financials indicate potential increases in expenses related to baking equipment, supplies, long-term liabilities, and labor costs, which are expected byproducts of expansion efforts. However, these expenses are anticipated to be offset by a corresponding surge in revenue.
Despite a forecasted reduction in net income by 42% compared to the 2017 fiscal year, this initial decrease is seen as a temporary setback during the company's growth phase. Key areas
of focus include inventory costing, contingent liabilities, and the principle of revenue recognition. Currently employing a Last In, First Out (LIFO) inventory method, Peyton Approved periodically assesses its stock, which, while beneficial in the short term, may not suit long-term expansion (Whalen et. Al., 2017). Adopting a perpetual inventory system could enhance inventory management by providing real-time tracking of stock levels.
The LIFO method, which prioritizes the sale of most recently acquired inventory, tends to
increase the cost of goods sold and decrease net income. Transitioning to a First In, First Out (FIFO) method could offer a more sustainable approach to inventory management, potentially reversing the financial impacts observed under LIFO.
Attention must also be paid to contingent liabilities—future obligations that, while uncertain, must be accounted for if estimable (Banton, 2020). Accurate recording of potential liabilities, such as lawsuits and product warranties, is crucial for GAAP compliance. Moreover, the accurate and timely recognition of revenue ensures the reliability of reported net income (Whalen et.al., 2017).
Accuracy in pro forma statements is critical to prevent misinterpretation, as these documents may differ significantly between companies. Adjustments made to reflect operational performance could deviate from GAAP norms, necessitating cautious interpretation (Tuovila, 2020). Additionally, certain adjustments to rectify previous accounting errors may be excluded, further complicating the financial overview (Tuovila, 2020).
While pro forma statements are not bound by GAAP, misleading investors with overly optimistic or conservative estimates could have legal ramifications (Tuovila, 2012). In Peyton Approved's case, basing pro forma projections on realistic assumptions is vital to providing a credible financial forecast, avoiding unrealistic expectations, and laying the groundwork for future growth.
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References
Bragg, S. (2021, November 25). Pro Forma Financial Statements Definition. AccountingTools. Retrieved February 7, 2022, from https://www.accountingtools.com/articles/wat-are-pro-
forma-financial-statements.html
Tuovila, A. (2021, May 31) Revenue Recognition Definition. Investopedia. Retrieved February 7,2022, from https://www.investopedia.com/terms/r/revenuerecognition.asp
.
Wahlen, J.M., Jones, J.P., & Pagach, D.P. (2017), Intermediate Accounting and Reporting Analysis (2nd ed.). Cengage.
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