Abstract
This paper presents the analysis of the case study related to Natalie Koebel’s Cookie Creations with the focus on the questions associated with the topic of financial accounting. The first section of the paper provides the analysis of an appropriate form of business organization selected for Cookie Creations with reference to possible benefits and weaknesses, the discussion of the accounting information required for running this business, the discussion of needed financial accounts, the solution to the problem of using bank accounts, and the analysis of utilizing separate assets. The second section of the paper represents the detailed discussion of financial statements that can provide Natalie with information on businesses’ financial operations and profitability.
The focus is on examining specifics of financial statements that represent cash, solvency, profitability, debts, and dividends associated with a business’s operations, among other aspects. The third part of this case study analysis presents the discussion of issues that are associated with using accounting services and internal control strategies. Possible improvements related to using offered accounting services are also included in the analysis. The final section of the paper provides the answers to questions on using credit cards for paying for services and products that are offered by Cookie Creations. Moreover, journal entries for the company’s transactions are also presented. The overall analysis of the proposed case study ends with the concluding part to accentuate the role of examining and using the appropriately structured financial information for the business development in order to gain high profits.
Introduction
Starting a business and making it profitable are challenging tasks that require a person to pay much attention to financial information regarding the business development in order to make appropriate strategic decisions (O’Hare, 2016; Robinson, Henry, Pirie, & Broihahn, 2015). Natalie Koebel, the owner of Cookie Creations, has faced the necessity of concentrating on the study of different types of financial statements and accounting information in order to make sure that her business develops efficiently and will progress in the future (Kimmel, Weygandt, & Kieso, 2016). Referring to the case of Koebel’s Cookie Creations, it is important to recommend the most efficient form of business organization, to determine accounting information to examine, to discuss specifics of different types of financial statements, to analyze the appropriateness of using accounting services, and to evaluate the effectiveness of using credits for this business.
CCC1 Starting Natalie Koebel’s Business: Cookie Creations
Forms of Business Organization to Choose, Their Benefits and Weaknesses
A sole proprietorship, a partnership, and a corporation are considered to be different forms of business organization, from which Natalie can choose the most appropriate option for starting her own business. Referring to the requirements for establishing a business and available resources and capital, Natalie should choose a sole proprietorship because it is easy to set up and control her small company and accrue income. Furthermore, there are also tax advantages (Kimmel et al., 2016). However, a proprietorship cannot be easily sold, and it does not provide benefits associated with establishing a corporation: the absence of personal liability and higher abilities to raise funds. Still, corporations are owned by stockholders who influence their development. Moreover, a partnership allows for setting up the business quickly while using combined resources and sharing control. Nevertheless, Natalie cannot use a partnership because of planning to develop her business independently, and a partnership requires the use of an effective partnership agreement.
Required Accounting Information
To run her business effectively, Natalie needs accounting information that is organized as a system of records related to such Cookie Creations’ activities as financing, operating, and investing. She will require recording her financing activities with the focus on all sources of capital necessary for the business development, including borrowings and liabilities (Kimmel et al., 2016). Furthermore, Natalie will ask for recording information on investing activities associated with purchasing assets and generating cash. Revenues and expenses related to operations also need to be written down to analyze the company’s profitability. All this information is demanded monthly to control the growth of her business.
Accounts to Record Cookie Creations’ Transactions
Four types of financial statements are used to record assets and liabilities, as well as expenses and revenues of any business. They are a balance sheet, an income statement, a retained earnings statement, and a statement of cash flows. All owned resources (assets) and owed resources (liabilities) should be reflected in a balance sheet. Revenues and expenses are recorded in an income statement. Dividends and potential investments are reflected in a retained earnings statement (Kimmel et al., 2016; Reid & Myddelton, 2017). The sources of cash for Natalie’s business should be represented in a statement of cash flows.
Bank Accounts for Cookie Creations
For her business operations, Natalie should use a special bank account. The reason is that it is required for accounting to separate a business owner’s personal resources and cash associated with business operations (Worrell, 2014). As a result of opening a separate account, Natalie will be able to control the cash balance, use debit and credit cards and checks, and receive cash-free payments from customers.
Separating Business and Personal Assets
Natalie needs to separate their personal and business assets, which are represented in financial records, in order to protect her personal finances and avoid situations when all her personal assets work to cover or meet business credits. Thus, Natalie will be able to keep accurate accounting records for her business without mixing assets (Kimmel et al., 2016; Narayanaswamy, 2017). Still, if Natalie uses her car for her business needs, it is possible to recommend recording the use of fuel, required maintenance, routes, and mileage associated with her business activities in order to reflect this information in her financial statements.
CCC2 Leading Cookie Creations and Cooperating with Biscuits
Information Provided in Financial Statements
An income statement provides information about a business’s financial success in terms of received revenues and covered expenses. A balance sheet indicates the financial position of a firm in terms of its assets, liabilities, and stockholders’ equity. A statement of cash flows presents information on the received and paid cash during a certain period of time (Kimmel et al., 2016). In addition, there is also a retained earnings statement that is focused on income, dividends, and resources for supporting a business.
Financial Statements to Evaluate Businesses’ Cash
In order to evaluate the amount of cash that is owned by Biscuits to address its liabilities, it is important to examine the company’s statement of cash flows for the end of a fiscal year and focus on the company’s balance sheet in order to determine liabilities. The reference to both a statement of cash flows and a balance sheet is important for determining whether cash is enough to cover liabilities (Kimmel et al., 2016; Porter & Norton, 2016). Furthermore, this information is important for analyzing the company’s response to debts and its investing activities (Reid & Myddelton, 2017).
Financial Statements to Evaluate Businesses’ Solvency Ratio
The data provided in the company’s balance sheet is important to calculate the solvency ratio, as well as to evaluate the firm’s perspectives for a long period of time depending on its current financial performance (Kimmel et al., 2016; Worrell, 2014). It is also necessary to calculate the debt to total assets ratio that can demonstrate how many funds are provided by creditors. This situation can be risky and affect the company’s solvency directly.
Financial Statements to Evaluate Businesses’ Profitability
Natalie will be able to evaluate Biscuits’ profitability with reference to the income statement and calculated profitability ratios (Kimmel et al., 2016). Ratio analysis based on the information from an income statement allows for measuring a company’s profits for a certain period. It is important to refer to the net profit loss and the net profit margin to analyze Biscuits’ reported profits after paying taxes or losses (Porter & Norton, 2016).
Financial Statements to Examine Information on Debts
It is reasonable to calculate and evaluate the current ratio in comparison to the debt to total assets ratio for Biscuits in order to make conclusions regarding the company’s financial position and perspectives for the future (Kimmel et al., 2016; Porter & Norton, 2016). Thus, Natalie will be able to determine Biscuits’ possible outstanding debt, and the lower ratio is associated with the company’s better position. In this case, the focus is on the information presented in the balance sheet (Minnis & Sutherland, 2017).
Financial Statements to Examine Information on Dividends
In order to determine whether Biscuits can pay any dividends, Natalie should examine the statement of cash flows and balance sheet. Referring to the income statement, Natalie will determine specific dividends that are paid by Biscuits to shareholders and will be able to calculate the earnings per share ratio (Kimmel et al., 2016). The reference to the retained earnings statement is also required to conclude on the company’s position.
Other Areas of Concern
Additional areas of concern are the following ones: the analysis of the company’s performance during previous years and the ability of the company to address short-term obligations. It is also important to focus on the relationship between retained earnings and the stockholders’ equity presented in financial statements (Kimmel et al., 2016). Moreover, liquidity ratios should also be calculated with reference to the information presented in a balance sheet.
CCC7 Part 1 Using Accounting Services
Principles of Internal Control and Possible Weaknesses
Internal control is a special system that is used in operating businesses to detect and address any possible mistakes in balances and predict fraud with the help of ensuring the reliability of records and conducting operations according to the existing regulations and legal standards. Principles of internal control strategies and approaches are the following ones: the establishment of responsibility for conducting activities; the segregation of duties; proper documentation; the focus on specific physical controls; the emphasis on internal verification conducted independently; and the focus on human resource controls (Ge, Koester, & McVay, 2017; Kimmel et al., 2016). Referring to these principles, it is possible to identify some weaknesses in the approach proposed by John. Firstly, cash should be kept in another secured place, not John’s vehicle, according to the principle of segregation of duties. Secondly, John should not be authorized to sign checks. Accounting records should not be kept only on John’s computer. Moreover, he cannot write the check for his services by himself.
Improvements for Proposed Accounting Services
Natalie should be authorized to write and sign all checks as the owner of the business. The cash should be deposited oftener, and a strongbox should be used for keeping the cash. If John still holds cash in a safe place, it is also possible to recommend bonding this employee to receive insurance and protect resources according to the principle of human resource controls (Kimmel et al., 2016). Natalie also needs to receive access to the accounting program used by John and monitor all changes in records. The use of copies and online protected storage is recommended.
CCC8 Using Credits at Cookie Creations
Extending Credits
To decide on extending credit to Curtis, Natalie is expected to calculate the business’s liquidity. As a result, she will learn whether Curtis can cover liabilities within a short period of time. It is also necessary to calculate the current and quick ratios while focusing on assets and liabilities reported in financial statements (Kimmel et al., 2016). Natalie should also focus on Curtis’s credit statement from the bank.
Alternatives for Extending Credits
Instead of extending credit, Natalie can propose Curtis pay half of the price immediately, and the other part can be paid later according to the schedule agreed with Natalie. In addition, she can also propose discounts for providing the payment earlier (O’Brien, 2015). As a result, Natalie will receive a certain percentage of the payment earlier than in 30 days. She needs guarantees to agree to provide this credit.
Advantages and Disadvantages of Using Credit Cards
The strategy of allowing customers to use their credit cards for purchasing Cookie Creations’ products has a lot of advantages because of attracting more consumers, opening opportunities for being expanded online, and receiving payments as quickly as possible. However, there are also disadvantages associated with this procedure (O’Hare, 2016; Robinson et al., 2015). The problem is that Natalie should have specific equipment in order to process credit cards, and she will need to follow certain procedures when processing chargebacks.
Conclusion
The purpose of this paper has been to provide the analysis of the case study related to Natalie Koebel as the owner of Cookie Creations and her business decisions associated with the field of accounting. The paper includes the answers to the questions related to the case with a focus on four important areas of knowledge. It is important to note that Natalie can succeed while selecting a sole proprietorship as the organization of her business for the first stage of the firm’s progress and then develop it in a corporation involving stockholders. The careful documentation of all financial information with reflecting it in financial statements is important at all stages of the process, and Natalie needs to understand the components of financial statements in order to build effective partnership relations within the industry.
References
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