Milestone Two Management Analysis Brief

docx

School

Southern New Hampshire University *

*We aren’t endorsed by this school

Course

308

Subject

Accounting

Date

Apr 3, 2024

Type

docx

Pages

Uploaded by DoctorRook19165

ACC 308-R3397 Intermediate Acct II: Management Analysis Brief Southern New Hampshire University

2 This management brief analyzes the Pro forma financial statements created for Peyton Approved. Pro forma financial statements can significantly benefit businesses by offering data for planning and predicting future economic changes, analyzing risks, securing funding, and making merging/selling decisions (Udavant, 2022). The Pro Forma statements that were created were the pro forma income statement that will allow the company to predict future revenues, cost of goods or services, and net profit. Also, the pro forma balance sheet that will allow the company to see changes to the assets and liabilities. These statements are not followed by GAAP and should only be used as a tool for making decisions for the second location. When reviewing these statements, we should consider reviewing the inventory costing. Eighty percent of the current store inventory was used to create an estimate for the new location. The company also uses the LIFO (Last In, First Out) inventory method. The LIFO cost flow assumption results in the most recent costs incurred being allocated to cost of goods sold, while the earliest (and oldest) costs are allocated to ending inventory (Wahlen et al., 2017). The company also uses the periodic inventory system, which a physical count of supplies is done periodically, at least once a year. According to the pro forma balance sheet, Peyton Approved is estimated to spend $28,222.48 in baking supplies and $229.27 in merchandise inventory at the end of 2018. We should also consider reviewing contingent liabilities. A contingent liability is a potential liability that may occur in the future, such as pending lawsuits or honoring product warranties (Banton, 2022). These liabilities are to be recorded on the financial statements if the contingency is likely and the amount can be reasonably estimated to meet GAAP requirements. Lastly, we should review revenue recognition. Revenue recognition is the process of formally measuring and reporting revenue in a company’s financial statements (Wahlen et al.,

3 2017). It is imperative to remember that revenue should be recorded during the period it is realized and earned, not when payment is received. To help with this revenue recognition principle, there are five steps that can be taken: (1) identify the contract with the customer; (2) identify contractual performance obligations; (3) determine the amount of consideration/price for the transaction; (4) allocate the determined amount of consideration/price to the contractual obligations; and (5) recognize revenue when the performing party satisfies the performance obligation (Tuovila, 2022). Following these steps can ensure GAAP requirements are being met and revenue are accurately reported for accurate net income. Peyton Approved should keep in mind that the pro forma financial statements are not actual numbers but only estimates which can misleading. For example, if the inflation rate is relatively high, the amounts associated with assets and liabilities in the balance sheet will appear low, since they are not being adjusted for inflation (AccountingTools, 2023). Management should still use sound judgement when making decisions regarding the new location.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

4 REFERENCES Banton, C. (2022, July 12). Contingent Liability: What Is It, and What Are Some Examples ?. Investopedia. https://www.investopedia.com/terms/c/contingentliability.asp Limitations of Financial Statements. (2023, January 18). AccountingTools. https://www.accountingtools.com/articles/limitations-of-financial-statements.html Tuovila, A. (2022, May 20). Revenue Recognition: What It Means in Accounting and the 5 Steps. Investopedia. https://www.investopedia.com/terms/r/revenuerecognition.asp Udavant, S. (2022, July 28). Why You Need Pro-Forma Financial Statements. The Balance. https://www.thebalancemoney.com/why-you-need-pro-forma-financial-statements- 5222206 Wahlen, J. M., Jones, J. P., & Pagach, D. P. (2017). Intermediate accounting: Reporting and analysis (2nd ed.). Boston, MA: Cengage Learning.