Instructions

In addition to recording and reporting information, accountants often need to explain information to internal and external stakeholders. Dan’s Dependable Delivery needs your help in understanding some accounting concepts.

Dan’s Dependable Delivery is considering making an investment in another company. The two companies under consideration are AAA Inc. and ZZZ Inc. You are given a set of financial information for each company on the Excel spreadsheet linked here. Year one is the current year and year 2 is the previous year. When considering AAA Inc. and ZZZ Inc., the Board of Directors at Dan’s Dependable Delivery needs clarification on several accounting concepts. Each of the areas in question relate to the six modules covered in this class.

When answering the Board of Director’s questions, you will want to give complete, concise, and accurate information. The Board needs to make a good decision in a short amount of time, and they do not have time to read long reports. Each written response should be in complete sentences, single spaced, and well organized. Simple tables may be used when appropriate. Be sure to explain the information in your table. Each response will be about half a page; if it is more than three-fourths of a page, please revise your explanation. When calculations are needed, an Excel spreadsheet may be used. Make the information concise and easy to understand.

Accounting Concept #1 Fixed Assets:

The Board of Directors at Dan’s Dependable Delivery would like clarification on each company’s assets. Please address the Board of Directors’ concerns.

• The Board is questioning how ZZZ Inc., which has more Property Plant and Equipment, can take less depreciation expense than AAA Inc. However, AAA Inc. has less Property Plant and Equipment, but the depreciation expense is more. Explain.
• Which depreciation method does each company use and how do they decide on a method?
• How does depreciation expense affect the financial statements?
• Is either company investing in new PPE? How do you know?
• What types of intangible assets does each company have? Has either company acquired intangible assets this year? If so, what is it?

Accounting Concept #2 Liabilities:
The Board of Directors at Dan’s Dependable Delivery is concerned about each company’s current and long-term debt. These are their questions:

• AAA Inc. and ZZZ Inc. have liabilities with a known amount, estimated liabilities, and contingent liabilities. What are these liabilities for each company, and how are they accounted for on the financial statements? Give Examples of each.
• Did AAA Inc. or ZZZ Inc. issue any bonds in the current year? Give the specifics of each bond issued (number of years, interest amount, was it issued at a discount, premium, or at par). Did either company have bonds from previous years? Explain.
• If AAA Inc. was considering a short-term note to purchase inventory for a special project, how much interest would they pay? On October 1, AAA Inc. records a short-term, six-month, 7% note in the amount of $5,000. What is accrued interest on December 31? What is the maturity value of the note? How much is the total interest paid?

Accounting Concept #3 Equity:

The Board of Directors at Dan’s Dependable Delivery would like clarification on each company’s ownership or equity. Use the stockholders’ equity section of the balance sheet to explain what happened to stock ownership in company AAA Inc. and ZZZ Inc.

For each company answer these questions for the Board of Directors:

• What kind of stock does each company issue?
• Explain the difference between authorized, issued, and outstanding shares.
• How many shares are authorized, issued, and outstanding for both companies in year one and year two.
• How many shares did each company issue in the current year?
• Did either company pay dividends in the current year? If so, how many shares received dividends? If they paid dividends, what was the total amount of dividends paid? What is the dividends per share and how often are dividends paid?
• Prepare a Statement of Retained Earnings for the current year for each company.

Accounting Concept #4 Cash Flow:

The Board of Directors at Dan’s Dependable Delivery would like clarification on each company’s cash flows statement. Use the financial statements, specifically the statement of cash flows to explain the cash flows of company AAA Inc. and ZZZ Inc.

For each company answer these questions for the Board of Directors:

• What is the purpose of a statement of cash flows, and what important information can be gleaned from it?
• What method of presenting cash flows from operations does each company use? How do you know?
• Does the cash flow from operations provide enough cash to cover investing and financing activities for both companies in all years presented? Why is this important?
• What does the cash flow statement disclose about the cash management for each company? With respect to cash, which company is stronger?

Accounting Concept #5 Analysis:

The Board of Directors at Dan’s Dependable Delivery would like clarification on each company’s financial health and stability. Use tab 2 (Ratios) of the Excel Spreadsheet to calculate the following ratios for company AAA Inc. and ZZZ Inc.

For each company answer these questions for the Board of Directors:

• What conclusions do you come to about the profitability of each company?
• What conclusions do you come to about the liquidity of each company?
• What conclusions do you come to about the return on assets for each company?
• What does the debt ratio tell you about each company?
• What conclusions do you come to about the return on equity for each company?
• Taking into account the full ratio analysis which company is a better investment and why?

Accounting Concept #6 Budget:

The Board of Directors at Dan’s Dependable Delivery wants a glimpse into the future. Use tab 3 (Income Statement) of the Excel spreadsheet to prepare an income statement for the coming year for both companies. Base your income statements on the following assumptions:

• Sales are expected to increase 5% for AAA Inc. and 2% for ZZZ Inc.
• COGS will increase 1% for AAA Inc. and decrease 1% for ZZZ Inc.
• Selling and Marketing Expense will increase for AAA Inc. by 2% and remain constant as a percent of sales for ZZZ Inc.
• Administrative Expense will remain constant as a percent of sales for each company.
• Depreciation will increase 5% for each company.
• Interest expense will increase 10% for each company.
• Income taxes will remain constant as a percent for each company.
• No new shares will be issued or purchased in the coming year.
• After preparing the budget for each company, which do you feel is the better investment with respect to the coming year?