Accounting Project

E/MBA Class of Dec 2023

Group #12, EMBA48
Stephanie Joshi Sljoshi04@gmail.com

Iman Samaddar iman.samaddar@gmail.com

Saswata Chakraborty Saswatamech@gmail.com

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Accounting Project

Table of Contents
Financial Statements and Profitability Review ...............................................................................................................3
Key Assumptions ...................................................................................................................................................................3
Financial Ratio analysis performed.................................................................................................. 3
Recommendations................................................................................................................................................................3
Financial Statements ..............................................................................................................................................................4
Calculations ...............................................................................................................................................................................6
Appendix.....................................................................................................................................................................................7

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Accounting Project

Highland Malt Case Study - Financial Statements and Profitability Review

This Case Study offers recommendations for improving financials for Highland Malt’s business
model based on a review of financial statements and ratios.
Key Assumptions Per requirements all calculations were made in US dollars, the analysis ignores
income taxes, and it was assumed that interest was not compounding.
For true Revenue reflection, barrels sales were reflected in full in the Highland books, then
commissions is paid out to Spencer’s. While Adger’s expertise directly impacts the quality of the
product; his salary was treated as an overhead cost, and it was assumed that his salary was
independent of the SG&A existing, fixed cost overhead of Salary and Wages.
The $30K payable in 2020 to the Expert for work to be completed in 2020 were not included in
the entries for 2019 as both the work and payment are to be in 2020. (If included there would
be a Dr to Salary expense and a Cr to Accounts Payable. This addition would have minimal impact
to the Ratio calculations.) Lastly, we used FIFO as the preferred accounting method for sales.
Financial Ratio Analysis Performed (Calculations are documented in the following section of the
document and rounded to the nearest 100th):
2018 2019 Industry 2018 2019 Industry
Avg 2019* Avg 2019*
ROE -0.01 6% 17.9% Quick Ratio 8 1.15
-Profitability 0.02 ROA/ROI -1% 6% 12.9%
-Efficiency 2.92 Net Margin 2% 10.7%
-Capital Structure 1.08 Debt-to-Equity 0.07 0.08 0.40
Asset Turnover Days 120/days 302/days Debt-to-Asset 0.06 0.07
Current Ratio 14.25 4.69
*Beer, Wine, And Distilled Alcoholic Beverages: industry financial ratios benchmarking

Recommendations: Highland has opportunity to improve the 2% Net Margin.

Immediate impact to Balance sheet and increasing cash flows:
Loan interest will be gone with the Bank loan, as of Jan 1, 2020. While Highland has $380K in cash
at the end of 2019, avoid additional loans and interest payments to decrease expenses.
Use cash for reinvestment in Highland Malt or in lucrative markets for earnings to generate cash.
We recommend no dividend payments and using retained earnings for reinvestment, until Net
Margin reaches a healthier 8% (current margin is 2%).
Increasing marketplace, sales, and income:
Create a rent structure for the barrels sold making Rent a revenue generator (ex. If rent is
$900/yr. per barrel, the first 100 barrels sold covers the shipyard rent of $90K/yr. and the rent
for the additional 150 barrels sold will generate $135K in revenue.)
Analyze the potential cost savings of bringing the sales arm in house or renegotiating the
Commissions amount paid to Spencer's to reduce overhead and earn more per barrel.
The initial $75,000 spent on Advertising in 2019 created the brand and generated $2.5M
Revenue, a 3% ROI. By reinvesting some cash into advertising, we could reach a larger base,
increase the brand, and increase the price of future barrel sales.
Industry Comparison:
While we have a low Asset turnover days and good debt-to-equity compared to the Industry,
Highland still has very slim Net Margins, and we believe this reenforces the recommendations to
make efforts decreasing expenses and increasing profits.

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Financial Statements

Income Statement (In US Dollars)

Account Year 2018 Year 2019 Retained Earnings Statement
Revenues - 2,500,000 (In US Dollars)
-COGS - 1,700,000 2018 2019
= Gross Profit - 800,000 Beginning - (5,000)
-SG&A - 745,000 Net Gain/Loss 5,000) 50,000
=EBIT - 55,000 Dividends Paid - -
-Interest Expense 5,000 5,000 End Retained (5,000) 45,000
=EBT (5,000) 50,000
-Income Tax - -
=Net Income (5,000) 50,000

Balance Sheet (In US Dollars)

Account 2018 2019 Change Column1
Assets
Cash 170,000 380,000 210,000 124%
Inventory 625,000 375,000 (250,000) -40%
Accounts Receivable - 100,000 100,000
TOTAL 795,000 855,000 60,000 8%
-
Liabilities -
Current -
Accounts Payable - - -
Commissions Payable 10,000 10,000
Bank Loan - Current - 50,000 50,000
Long Term -
Bank Loan - Long Term 50,000 - (50,000) -100%
Total Liability 50,000 60,000 10,000
Equity -
Paid in Capital 750,000 750,000 - 0%
Retained Earnings (5,000) 45,000 50,000 -1000%
Total Equity 745,000 795,000 50,000

TOTAL 795,000 855,000 60,000 8%

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Financial Statements (continued)

Cash Flow Statement (In US Dollars)

Account Year 2018 Year 2019
Cash flows from Operating Activities
Net Income (5,000) 50,000
Depreciation Exp (+) - -
Increase in Inventory (625,000) (1,450,000)
Decrease in Inventory 1,700,000
Accounts Recievable (100,000)
Accounts Payable 10,000

= Net Cash Flows from Operating Activities (630,000) 210,000

Cash flows from Investing

Cash inflows from investing activities
cash outflows from investing activities (-)
=Net cash flows from Investing activities - -

Cash inflows from financing activities

Cash inflows from bank loan 50,000
Cash inflows from Paid in Capital 750,000
cash outflows from financing activities (-)
=Net cash flows from financing activities 800,000 -
=Net cash flows during period 170,000 210,000
Beginning cash balance (+) - 170,000
=Ending cash balance 170,000 380,000

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Calculations:
Inventory Calculations and FIFO accounting for 250 barrels sold to calculate COGS
We first created a chart of product creation along with the cost to create the product, which
varied based on materials at each creation. Our total inventory created from 2018 – 2019 is as
follows.
Jan 2018 50 barrels created costing $6000/Barrel
Jul 2018 50 Barrels created costing $6500/barrel
Jan 2019 100 barrels created costing $7000/Barrel
Jul 2019 100 Barrels created costing $7500/barrel
In 2019 250 Barrels were sold and the Cost of goods sold (COGS) were calculated, as instructed
by First in First out (FIFO) Calculation. FIFO sells the inventory made first or the inventory that
has been in store longest first.
(50 barrels *6000) + (50 barrels * 6500) + (100 Barrels * 7000) + (50 Barrels * 7500) =
300000+325000+700000+375000= $1,700,000 COGS for the 250 barrels sold.
By this calculation, there were 300 barrels made in total, 250 were sold and the last 50 made at
$7500/barrel remain in inventory at the end of 2019.

Retained earnings = Beginning Earnings + Net Gain/Loss – Dividends

Ratios
Ratios Calculation 2018 2019
Return on Equity
ROE Net Income/Equity -5000/745000 = - 50000/795000 = 0.06*100 =
0.01*100 = -1% 6%
-Profitability Net Income/Total Sales 50000/2500000 = 0.02
-Efficiency Total Sales/Total Assets 2500000/855000 = 2.92
-Capital Structure Total Assets/Equity 855555/795000 = 1.08
Asset Turnover Ratio Total Sales (Rev)/Avg 2500000/((795000+855000)/2)
reflected in days Total Assets = 3.03; 365/3.03 = 120 days
Inventory Turnover COGS/Avg Inventory
Current Ratio Current Assets/Current 855000/60000 = 14.25
Liabilities
Quick Ratio Current Assets- (855000-375000)/60000 = 8
Inventory/Current
Liabilities
ROA/ROI Net Income/Assets -5000/795000 = -0.01 50000/855000 = 0.06*100=6%
Net Margin Net Income/Revenue 50000/250000 = 0.02*100=2%
(Total Sales)
Debt-to-Equity Liabilities/Equity 50000/745000 = 0.07 60000/795000 = 0.08
Debt-to-Asset Liabilities/Assets 50000/795000 = 0.06 60000/855000 = 0.07

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Accounting Project

Appendix:
Highland Malt 2018 Journal (In US Dollars)
Debited Account Credited Account Debit Credit
Cash 750,000.00
Paid-in Capital 750,000.00
Cash 50,000.00
Bank Loan - Long Term 50,000.00
Interest Expense 5,000.00
Cash 5,000.00
Inventory 300,000.00
Cash 300,000.00
Inventory 325,000.00
Cash 325,000.00
Total 1,430,000.00 1,430,000.00

2018 Assumptions:
No SG&A Accounted for as the description "Fixed cost accounts for expenses incurred in 2019
(see Exhibit 4)"
Per Course requirements we ignored Taxes
Used Straight interest with no compounding
Inventory was created in 2 batches, Jan and Jul.
Jan 50 barrels, @ $6000/Barrel
Jul 50 Barrels, @$6500/barrel

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Accounting Project

2018 Ledger (In US Dollars)

Change from
Account Usual Balance Total Debits Total Credits Previous Year
Cash Debit 800,000 630,000 170,000
Paid-in Capital Credit - 750,000 750,000
Interest Expense Debit 5,000 - 5,000
Inventory Debit 625,000 - 625,000
Rent Expense - shipyard Debit - - -
Rent Expense - Equipt Debit - - -
Advertising Expense Debit - - -
Office and Admin Expense Debit - - -
Salaries and Wages Expense Debit - - -
Repairs and Maintenance Expense Debit - - -
Supplies Expense Debit - - -
Utilities Expense Debit - - -
Accounts Receivable Debit - - -
Sales Commish Expense Debit - - -
Revenue Credit - - -
COGS Debit - - -
Salary Expense - Expert Debit - - -
Accounts Payable Credit - - -
Bank Loan - Long Term Credit - 50,000 50,000
Bank Loan - Current Credit - - -
Total 1,430,000 1,430,000

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Accounting Project

Highland Malt 2019 Journal (In US Dollars)

Debited Account Credited Account Debit Credit
Rent Expense - shipyard 90,000
Cash 90,000
Rent Expense - Equipt 50,000
Cash 50,000
Advertising Expense 75,000
Cash 75,000
Office and Admin Expense 10,000
Cash 10,000
Salaries and Wages Expense 130,000
Cash 130,000
Repairs and Maintenance Expense 25,000
Cash 25,000
Supplies Expense 25,000
Cash 25,000
Utilities Expense 40,000
Cash 40,000
Inventory 700,000
Cash 700,000
Inventory 750,000
Cash 750,000
Cash 2,400,000
Accounts Receivable 100,000
Revenue 2,500,000
Sales Commish Expense 240,000
Cash 240,000
Sales Commish Expense 10,000
Commissions Payable 10,000
COGS 300,000
COGS 325,000
COGS 700,000
COGS 375,000
Inventory 1,700,000
Salary Expense - Expert 50,000
Cash 50,000
Bank Loan - Long Term 50,000
Bank Loan - Current 50,000
Interest Expense 5,000
Cash 5,000
Total 6,450,000 6,450,000

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2019 Assumptions:
Per Course requirements we ignored Taxes
Used Straight interest with no compounding
Inventory was created in 2 batches, Jan and Jul 2019.
Jan 100 barrels, @ $7000/Barrel
Jul 100 Barrels, @$7500/barrel
Used FIFO accounting for 250 barrels sold COGS
Jan '18 50 barrels, @ $6000/Barrel
Jul '18 50 Barrels, @$6500/barrel
Jan '19 100 barrels, @ $7000/Barrel
Jul '19 100 Barrels, @$7500/barrel
250 Barrels sold. FIFO Calculation sells the first inventory made first:
(50 barrels *6000) + (50 barrels * 6500) + (100 Barrels * 7000) + (50 Barrels * 7500) =
300000+325000+700000+375000= $1,700,000 COGS
We assumed, that the entire Cash sale shows in our books and that we then remove the
Commissions to Spencer's from our books
We assumed that the Expert Salary costs were NOT included in the SG&A fixed cost overhead
We assumed that the Expert Salary costs were an overhead expense not direct, COGS
expense
We did not account for the Expert Salary, $30,000 due in 2020 for "subsequent work" in 2020
Fixed costs copied from exhibit 4, including Office and Admin, Salaries and wages, repairs and
maintenance, supplies, and utilities were all assumed to be Overhead, indirect costs.

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2019 Ledger (In US Dollars)

Change from
Account Usual Balance Total Debits Total Credits Previous Year
Cash Debit 2,400,000 2,190,000 210,000
Paid-in Capital Credit - - -
Interest Expense Debit 5,000 - 5,000
Inventory Debit 1,450,000 1,700,000 (250,000)
Rent Expense - shipyard Debit 90,000 - 90,000
Rent Expense - Equipt Debit 50,000 - 50,000
Advertising Expense Debit 75,000 - 75,000
Office and Admin Expense Debit 10,000 - 10,000
Salaries and Wages Expense Debit 130,000 - 130,000
Repairs and Maintenance Expense Debit 25,000 - 25,000
Supplies Expense Debit 25,000 - 25,000
Utilities Expense Debit 40,000 - 40,000
Accounts Receivable Debit 100,000 - 100,000
Sales Commish Expense Debit 250,000 - 250,000
Revenue Credit - 2,500,000 2,500,000
COGS Debit 1,700,000 - 1,700,000
Salary Expense - Expert Debit 50,000 - 50,000
Accounts Payable Credit - - -
Bank Loan - Long Term Credit 50,000 - (50,000)
Bank Loan - Current Credit - 50,000 50,000
Commissions Payable Credit - 10,000 10,000
Total 6,450,000 6,450,000

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