Task:
Well you made it and you have hung up your shingle that your are a CPA and are prepared to take on new clients. You sit down at your desk, turn on your shiny new Dell Laptop with wireless connection, take a sip of your steamy hot Starbucks Coffee and gaze at that beautiful shiny new wooden desk (that set you back $1000). Just then the door flies open and this big 6’4” man with a ten gallon hat steps into your office. He has big old cowboy boots caked in in dirt and a shiny rhinestone jacket and new Levi Dungarees. He sits down leans back and puts his dirty boots on that shiny new desk (size 14 of course).
He says, “My name is Tex A. Slong, my business is cattle, and you have to have to help me. They are running all over the place.” You look at Mr. Slong bewildered, “what is running all over the place, also could you please take your boots down I can not see your face.” “Oh, sorry , little lady (or son), the cattle, the cattle are everywhere, my wife says if I don’t do something she’ll leave me. Got one in my bedroom.” So you ask, “what happened? “ Tex answers,
”I don’t know, and my business is going to pots, I never have any cash to pay my creditors, I really need your help.” You ask Tex is he brought anything for your too look at and he pulls this crumply piece of paper from his wallet. “Here, I put this together in the car coming over here.”
This is what the paper looked like:
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Balance
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Sheet
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2008
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2007
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ASSETS
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Cash
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2,500
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500,000
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Investments
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1,000,000
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1,000,000
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Accounts Rec.
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500,000
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200,000
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Total
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1,502,500
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1,700,000
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INVENTORY
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Machinery
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2,000,000
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2,000,000
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Less Deprec.
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-1,100,000
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-1,000,000
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Cattle
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3,000,000
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2,500,000
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3,900,000
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3,500,000
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LIABILITIES
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Long Term Debt
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500,000
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500,000
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Short Term Debt
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100,000
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100,000
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EQUITY
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Retained Earnings
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3,400,000
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3,000,000
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Income
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Statement
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2008
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2007
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Gross Sales
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2,000,000
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2,500,000
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Cost of Good Sold
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1,300,000
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1,500,000
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Net Sales
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700,000
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1,000,000
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Expenses
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650,000
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600,000
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Net Income
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50,000
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400,000
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Question 1: Using the knowledge of ratios, look at the numbers above and see if you can identify Tex’s problems. Assume all sales are credit Net 30 sales. What advice would you offer Tex in order to help out the situation. Should Tex liquidate some of his investments to pay his bills until something changes? How is he going to get the money to pay his creditors?
Question 2: Now that you have solved Tex’s issues, what would you suggest he plan for the next fiscal year? Should Tex wait until December 31st every year to see his numbers? What would you advise Tex to do? Why? Would your ideas change if Tex sold oil, or cars, or ladies handbags? What types of budgets is your analysis going to focus on? What budget should you start with first?
Question 3: What is the purpose of identifying variances in budgets? Does have a favorable variance always mean a positive situation? How about negative? Can you share two examples where a favorable variance could have a negative underlying affect.