Financial Statement Investigation A02-04-2015

FSI Revised 09-15-2021

WRITE-UP ASSIGNMENT #1

Glo-Stick, Inc.
In late 2018, Norman Davis, the estranged brother of Mary Davis (the president and chief executive
officer of Sunshine Lite-Stick, Inc.), formed a company, Glo-Stick, Inc., to compete with his sister’s
company, Sunshine Lite-Stick, Inc. Mary Davis was stunned when she learned of her brother’s actions to
form Glo-Stick at the end of 2018. She had anticipated that competition for her Sunshine Lite-Stick prod-
uct would likely appear after five years. Her brother’s formation of Glo-Stick would represent real direct
competition to Sunshine.
Norman Davis had been careful in obtaining a separate patent for the technology needed to develop
the Glo-Stick product for his company so as not to violate the patent rights for the Sunshine product.
On January 1, 2019, Norman Davis, established Glo-Stick, Inc. with 350,000 shares of Glo-Stick
common stock at $1 per share. Glo-Stick raised $350,000 of cash by selling all 350,000 shares to Norman
Davis for $350,000 on January 1, 2019. Also, on January 1, 2019, Glo-Stick, Inc., entered into the follow-
ing transactions:

• January 1—Borrowed $250,000 from a local bank to help the Company finance the business.

• January 1—Purchased the Glo-Stick patent from Norman Davis for $120,000 in cash.

• January 1—Paid $200,000 for a building where the Glo-Sticks would be manufactured.

• January 1—Paid $150,000 for machinery that would be used to produce the Glo-Sticks.

• January 1—Paid $50,000 to suppliers for plastics and chemicals to be used in the production of Glo-
Sticks.
During 2019, Glo-Stick, Inc. went into operation. To prepare the financial statements in early January
2020, Brian Murray, the firm's bookkeeper, produced the following data:
1. Besides the $50,000 of plastics and chemicals purchased on January 1, 2019, during 2019 Glo-
Stick, Inc. purchased an additional $250,000 of plastics and chemicals from suppliers. Of this
$250,000 total, during the year the Company paid its suppliers cash of $200,000 and still owed
suppliers $50,000 on December 31, 2019.
2. Throughout 2019, Glo-Stick, Inc., paid advertisers $20,000 to market Glo-Sticks. The Company
expected to pay another $20,000 for advertising in 2020.
3. During the 12 months ended December 31, 2019, the Company expended $420,000 on direct
manufacturing labor, and on manufacturing-related overhead (rent, utilities, supervisory labor).
4. An additional $100,000 was spent on corporate salaries and other corporate expenses.

5. During the twelve months ended on December 31, 2019, Glo-Stick sold $950,000 of its product.
The largest single purchaser still owed Glo-Stick, Inc., $100,000. All other customers' accounts

Norman J. Bartczak, Columbia University, prepared this case as a basis for class discussion. It is not intended to illustrate either
effective of ineffective handling of an administrative situation. Copyright © 2015 Norman J. Bartczak.
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Glo-Stick, Inc. – Written Assignment #1 A02-04-2015
Revised 09-15-2021

were paid in full by year-end.

6. On December 31, 2019, the Company paid the local bank $25,000 in interest on the $250,000
bank loan. The $250,000 principal on the bank loan was still owed to the bank at year-end and
was not due to be paid back until January 1, 2022.
In preparing his state of the corporation report, Davis noted with some anxiety that the company's
bank balance had fallen to $165,000 from the $600,000 originally raised on January 1, 2019 from the sale
of its shares and the bank loan. It bothered him because he believed that the company was really doing
quite well, and he failed to understand why the bank account did not appear to reflect this condition. In
surveying the transactions incurred by Glo-Stick, Inc., over the entire year, he noted the following:
1. The building in which the Glo-Sticks would be manufactured was expected to last for 40 years.
2. The machinery used in the production of the Glo-Sticks was general purpose machinery, not re-
stricted to Glo-Stick production, that might reasonably be expected to last for 10 years.
3. There was still an inventory at December 31 of $25,000 worth of plastics and chemicals in the
warehouse; however, there were no finished or partially finished Glo-Sticks at year-end.
4. The Glo-Stick patent has a legal life of 20 years but Norman Davis was convinced that another
competitor to Sunshine and Glo-Stick would most likely appear after 4 years.

Questions:
1. Using the attached T-Accounts, as best you can record (“bookkeep”) the transactions for the Glo-Stick,
Inc. from the period January 1, 2019 through December 31, 2019. Assume the Company’s tax rate is
20%. Also, assume that the Company uses straight-line depreciation and straight-line amortization.

2. After including a provision for income taxes at 20%, close out the Income Statement T-Account to
the Balance Sheet T-Accounts. Prepare a formal Income Statement and a formal balance sheet for
Glo-Stick, Inc.

3. A well know measure of performance is a company’s return on equity (Net Income/Beginning Share-
holders’ Equity). Based on your results, in your opinion, did Glo-Stick perform better, the same, or
worse than Sunshine Lite-Stick in its first year of operations? As a potential investor in either Sunshine
or Glo-Stick, which company do you think is riskier? Given an investment choice between Sunshine or
Glo-Stick, but not both, in which company would you invest? Briefly explain your answers.

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A02-05-2015 Glo-Stick, Inc. – Written Assignment #1
Revised 09-15-2021

GLO-STICK, INC.
1. Using the following T-Accounts, record (“bookkeep”) the transactions for Glo-Stick, Inc. from the period Janu-
ary 1, 2019 through December 31, 2019. NOTE: You will need to supply “titles”. The number of T-Accounts
supplied is “suggestive” as to how many you will need.
Balance Sheet T-Accounts

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Glo-Stick, Inc. – Written Assignment #1 A02-04-2015
Revised 09-15-2021

GLO-STICK, INC.
Balance Sheet T-Accounts
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A02-05-2015 Glo-Stick, Inc. – Written Assignment #1
Revised 09-15-2021

GLO-STICK, INC.
Balance Sheet T-Accounts
(continued)

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Glo-Stick, Inc. – Written Assignment #1 A02-04-2015
Revised 09-15-2021

Income Statement T-Accounts to be "Closed Out" to

Retained Earnings on the Balance Sheet
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Expenses | Revenues
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