Cookie Creations Chapters 9 And 10 This Assignment Wi 719046

cookie Creations Chapters 9 And 10this Assignment Will F

Review the case situations in Chapters 9 and 10 of your textbook involving Natalie’s business, focusing on analyzing financial statements for extending credit, considering credit card options, recording transactions, and calculating asset depreciation for a van purchase. Address Natalie’s questions regarding credit analysis, alternative payment methods, journal entries for transactions, and apply depreciation methods to a van with related calculations. Provide detailed responses in a Word document, supported by journal entries and depreciation tables in Excel spreadsheets.

Paper For Above instruction

The case study involving Natalie’s Cookie Creations provides a comprehensive scenario to evaluate credit extension, financial decision-making, and asset depreciation—key components in managerial accounting and financial management. This analysis is critical for small business owners to make informed financial decisions that impact their cash flow, profitability, and long-term sustainability. The case involves multiple facets, including analyzing financial statements to assess creditworthiness, exploring alternative payment methods like credit cards, recording journal entries for specific transactions, and calculating depreciation to account for asset wear and tear over time.

Part I: Credit Analysis and Transaction Recording

Natalie’s decision to extend credit to Curtis Lesperance hinges on a thorough analysis of the financial statements he provided. To evaluate his creditworthiness, key financial ratios should be calculated, such as the current ratio, debt-to-equity ratio, and accounts receivable turnover. The current ratio indicates Curtis’s ability to cover short-term liabilities with current assets, providing insights into liquidity (Harris & Brigham, 2015). A high debt-to-equity ratio might suggest excessive leverage, increasing the risk of default. The accounts receivable turnover ratio measures how efficiently Curtis collects outstanding credit, reflecting his cash flow management (Gibson, 2019). Auditing these ratios against industry benchmarks helps determine his credit risk. Additionally, his recent cash flow statements and profitability metrics should be reviewed to assess whether he consistently generates sufficient income to meet his obligations (Brigham & Ehrhardt, 2016).

Given the financial data, the analysis will reveal whether Curtis maintains a healthy liquidity position and manageable debt levels. If his ratios indicate stability, extending credit on the terms n/30 could be justified. Conversely, if liquidity is weak, alternative arrangements such as a partial payment upfront, a shorter credit term, or collateral security should be considered (McGuigan et al., 2019). Another alternative is to accept credit card payments, which offer certain advantages: quick processing, reduced fraud risk, and immediate funds transfer. However, disadvantages include processing fees, potential declines during fraud checks, and commissions that might reduce profit margins (Baker & Ricci, 2017). Accepting credit cards could enhance cash flow and customer convenience but should be evaluated against cost implications and operational capacity.

For the transactions from June through August 2020, journal entries need to be accurately recorded under a perpetual inventory system. The initial sale on credit in June must be recognized by debiting accounts receivable and crediting sales revenue, with inventory reduction recorded by debiting cost of goods sold and crediting inventory (Weygandt et al., 2018). When Curtis signs the note in July, a note receivable is recorded, replacing accounts receivable, with interest revenue recognized over time. The dishonor of the note in August requires adjusting entries to reflect the payment delay, and finally, the receipt of his check should close the receivable account. These journal entries ensure accurate financial records and aid in income measurement, cash flow tracking, and risk management (Wild et al., 2017).

Part II: Depreciation Calculation and Impact

Natalie plans to purchase a van for business use, with an estimated total cost comprising the purchase price, paint, removal of the back seat, and shelving units—totaling $41,500. The van’s expected useful life is five years, with a salvage value of $7,500 at the end of this period. The depreciation calculations—involving straight-line, double-declining balance, and units-of-activity methods—enable her to understand the financial impact on her income statement and balance sheet over the asset’s lifespan (Gibson, 2019).

Calculating the initial cost includes adding purchase price ($36,500), painting ($2,500), back seat removal ($1,500), totaling $41,500. The depreciation methods differ significantly in their impact:

  • The straight-line method evenly allocates depreciation over 5 years, resulting in annual expense of (Cost - Salvage value)/Useful life = ($41,500 - $7,500)/5 = $6,800 per year (Weygandt et al., 2018).
  • The double-declining balance method accelerates depreciation in early years by applying double the straight-line rate—specifically, 40% annually (2/5), multiplied by the book value at the beginning of each year (Brigham & Ehrhardt, 2016).
  • The units-of-activity method depends on mileage driven. For 2020, driving 15,000 miles results in depreciation calculated as (Miles driven / Total estimated miles) (Cost - Salvage value) = (15,000/200,000) ($41,500 - $7,500) = $2,100.

Applying these depreciation methods affects the financial statements differently:

Impact on December 31, 2020:

  • Straight-line: Total depreciation for 2020 is $6,800, reducing net book value accordingly.
  • Double-declining balance: Depreciation for 2020 is 40% of initial book value ($41,500), i.e., $16,600, resulting in a lower book value than straight-line, thus impacting assets and net income more significantly in early years.
  • Units-of-activity: Depreciation in 2020 based on actual miles driven, about $2,100, resulting in a lower expense compared to the other methods.

Impact over the van’s useful life:

Accelerated methods like double-declining balance front-load depreciation, reducing taxable income in early years and increasing it later. The straight-line method offers consistent expense recognition, simplifying income comparison year over year. The units-of-activity method aligns depreciation expenses with actual use, making it a suitable choice for assets with variable usage patterns like a delivery van (Wild et al., 2017).

Considering Natalie’s business and potential tax implications, I recommend the straight-line method for ease of reporting and predictability. It provides straightforward expense recognition, facilitating budgeting and financial analysis, especially given the asset’s predictable lifespan and salvage value (Gibson, 2019). However, if she expects variable usage and wants to optimize tax benefits early, double-declining balance could be advantageous.

References

  • Baker, J., & Ricci, P. (2017). The impact of credit card fees on small business profitability. Journal of Small Business Management, 55(2), 204-218.
  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
  • Gibson, C. H. (2019). Financial Reporting & Analysis. Cengage Learning.
  • Harris, E., & Brigham, E. (2015). Ratio Analysis for Effective Financial Management. Journal of Finance, 70(3), 985–1002.
  • McGuigan, J. R., Moyer, R. C., & Harris, F. H. (2019). Contemporary Financial Management. Cengage Learning.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2018). Financial Accounting. Wiley.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2017). Financial Statement Analysis. McGraw-Hill Education.

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