Marion Boats Case Study

Marion Boats Case Study

Jessica White

Northwood University – DEVOS Graduate School

MBA 632 Measurement I

Dr. Adam Guerrero

June 22, 2015

Executive Summary

The purpose of this case study is to examine and analyze the financial data derived from Marion Boats, Inc. transaction. From the perspective of the accountant, Mr. Hurley, the journal entries, balance sheet, owner equity, and indirect and direct cash flow statements are explained as to how they were prepared.

Analytical Point - Preparation of journal entries

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        With the accounting equation version of the journal entries each separate transaction makes it easy to distinguish whether they are an asset, liability or equity. Fred and Bill’s purchase of shares are listed separately whether than the sum total minus the legal cost. This is to strictly identify what their common stock issuance is. Since cash was used for purchasing of land, demolition and the construction of the building, all of those transactions added value to the building and land. Fred’s salary was calculated from the statement that they would receive $24,000 a year/$2,000 a month. He should have drawn income from Marion Boats, Inc. starting November 2005. So for 5 months he received a total income of $10,000. Differentiating the bank loan and the Sports Boat Loan is key as well. Since the bank loan was paid off within 5 months, it was put into accounts payable whether than a long term loan like the Sports Bank loan, since the Sports Bank Loan will be paid in time of the next 10 years with the first payment not even being due till March 2007, a year from when the first financial statements are prepared. One that was hard to decide where to put was the lawyer expense. The reasoning is because since the lawyer fee assessed allows the company to have an incorporation, which is a benefit to the company, it could be argued that the lawyer fee is an asset and would increase intangible assets. However because of how Fred and Bill decided to deduct the fee from the cash that was invested in the company, the lawyer fee is shown as an expense deducted from retained earnings. For Fred’s commission this was calculated by the statement for that each boat sold $40 in compensation for be earned. Fred sold 17 boats so this equated to $680. The revenue was the hardest to decipher since not all numbers were immediately presented. With the 17 boats that were sold it had a sales total of $183,600. Taking the $183,600 subtracting the $58,000 for trade in allowances, and subtracting the $112,000 in actual realized cash, the rest, $13,600 was put to accounts receivable because it is money still owed to Marion Boats by its customers. For the trade in boats, Fred was able to sell them for $54,800. This presents a significant problem. Fred overvalued the trade-ins. When taking in inventory to sell, you should never buy it for more than what you can sell it for, thereby making your profit off that inventory negative if you do. Which in Marion Boat’s case, it is exactly what they did, and why there is a $3,200 reduction of retained earnings.

Analytical Point – Preparation of balance sheet

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The balance sheet is fairly easy to put together once a journal transaction summary has been done. The key is to make sure computation is still done correctly and that the total assets still equal total liability and equity.  Summing the total of cash, accounts receivable, land and building should equal the sum total of accounts payable, loans (Sport Boats and bank loan), common stock and retained earnings. The balance sheet is where financial ratios come into play because having ratio data over time can show trends and see how Marion Boats is doing compared to other boat dealerships in their industry. Doing a current ratio (current assets/total liabilities), ( 310,520/204,600)=1.52. Meaning that as of March 31st, Marion Boats liquidity of assets available are $1.52 for every $1 of current liabilities.

Analytical Point – Value of owner’s equity

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        It’s necessary to go ahead and calculate Fred and Bill’s owner equity, because five months have already passed since the inception of their investment. While the return on investment might be minimal these calculations should start to develop a trend over time as profit increases. Key things to look for in the future would be rather or not Fred and Bill invest more money in the company. If this is done, then as an accountant the question is why. Especially this first year if Fred and Bill have to continually invest their own outside funds, it could be determined that the company is not stable. Also, before an owner’s equity can be done, the income statement must first be calculated to determine the exact amount of profit that  the company has incurred. Then based upon the percentage of ownership, it can then be calculated as to the equity earned in that statement.