Transactions 19-31

Pumped Up, Incorporated

Mid-Semester Project

6/1/2012

Created By:

Moya, Robert

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For: ACCT 3332 – Financial Statement Analysis

University of Houston – Victoria

School of Business Administration
Mid-Semester Project- The Development of Pumped Up, Inc.

The purpose of this project is to enhance your understanding of how financial statements function.

This project will walk you through the everyday, common transactions of Pumped Up, Incorporated the manufacturer of sports energy drinks. As we walk through the transactions we will construct and maintain the financial statements of Pumped, Inc. allowing you to correctly report the firm’s financial position.

The project will culminate with the complete construction of the financial statements and the publication of a mini-Annual Report to Shareholder’s. This project should fully prepare you for your final Financial Statement Analysis Project giving you insight into the inner workings of the financial statements and where to find key information need to analyze financial statements and ratios.

Startup Financing and Employee Staffing

Transaction #1: A private equity investor has agreed to exchange $2,000,000 cash for stock certificates which would represent 200,000 shares of common stock. Additionally, when the company was created, you purchased 50,000 of “owners stock” at $2 per share for a total investment of $100,000. There are now 250,000 outstanding shares of outstanding stock with the investor owning 80% of the company and you owning 20%.

Sell 200,000 shares of Pumped Up’s common stock ($1 par value) for $10 per share. Account for your initial investment of $100,000.

· Deposit the $2.0 million in cash received from the sale of the common stock certificates into Pumped Up’s bank account.

· The company has received cash therefore $2.0 million must be recorded in the Statement of Cash Flows as Sale of Capital Stock.

· The $2.0 Million in cash is also a new asset acquired by Pumped Up therefore we must increase CASH in the Balance Sheetby the amount received from the private equity partners.

· Every time a new asset is acquired, a corresponding liability must also be created to offset the transaction or else the Balance Sheet will be “out of balance.” Whenever a firm issues stock, it creates a liability for itself. When we issue stock, the company in a sense will now owe the new stockholders a portion of its assets. Therefore we need to increase the liability CAPITALSTOCK on the Balance Sheet by $2.0 Million.

Notes:

Common stock has the lowest priority to receive assets from a company if the company goes out of business. Common stockholders vote for the board of directors.

Preferred stock holds priority of common stock when a company pays out a dividend or distributes assets during bankruptcy. However, they do not hold the right to vote for directors.

Transaction #2: Pay the CEO’s first month’s salary including all payroll-related taxes and fringe benefits.

Book all payroll related expenses totaling $12,250 including salary, employer’s contributions to FICA and insurance expenses.

· Salary and fringe benefits are expenses that decrease income. Book the total monthly payroll expenses of $12,250 to G&A expenses in the Income Statement. Simultaneously decrease RETAINED EARNINGS in the Balance Sheet by the same amount.

· At this point, the CEOs paycheck is the only cash that has left the company. Under CASH DISBURSEMENTS in the Statement of Cash Flows, list the $6,300 check that was paid out. We also must decrease CASH in the Balance Sheet by the same amount.

· The remaining $5,950 in expenses are expenses that that are obligations to the government but have not yet been paid. We know that these are owed and will be due in the future by we have not yet paid them. Enter this amount under ACCRUED EXPENSES in the liability section of the Balance Sheet.

Transaction #3: Engage in financing to purchase a building. $2 million dollars borrowed for 10 years at 8% per annum.

Financing is needed to buy a building for manufacturing and storage of inventory. The building will also be used to house the administrative and sales activities of the company.

The bank has agreed to lend Pumped Up $2.0 million but we have to collateralize the loan with all of the company’s assets.

· Once the loan is closed, the bank deposits $2.0 Million CASH into Pumped Up’s checking account. This will increase NET BORROWINGS in the Statement of Cash Flows and increase CASH in the assets section of the Balance Sheet.

· The current portion of the debt ($200,000) that will be repaid this year is listed in the current liabilities sections of the Balance Sheet.

· The remaining debt of $1,800,000 (long-term liability) will be repaid over one year in advance so it is listed as long-term debt in the Balance Sheet.

Transaction #4: Pay $2.5 million for the building to be utilized for manufacturing, warehouse, and offices. Construct appropriate depreciation schedule.

Now that we have financing, we have searched and finally found the perfect building to house our operations. The building is 100,000 square feet and is appraised at $2.0 Million for the building and $700,000 for the land. The building contains 90,000 square feet of manufacturing and warehouse space and 10,000 square feet of office space.

After contentious negotiations, the agreed upon sale price of the building and land is $2.5 Million. Upon purchasing the building, Pumped Up will have acquired its first fixed asset (PP&E). Fixed assets are long-live productive assets such as buildings, machinery and fixtures, that are used to make, store, ship, and sell product. When fixed assets are acquired, the value is added to the Balance Sheet.

Accounting and IRS rules do not allow you to immediately “expense” the cost of acquiring a fixed asset. Instead, only a portion of their purchase price can be expensed each year since they have a long productive life. This type of annual expense is called depreciation.

· Write a check for $2.5 Million to the seller of the building/land. This cash transaction should be recorded under PP&E Purchase in the Statement of Cash Flows.

· We also need to lower CASH in the Balance Sheet by the $2.5 Million check that we wrote to purchase the building.

· In order to “balance” the Balance Sheet, we have to make another entry. We have to increase FIXED ASSETS @ COST on the Balance Sheet by the $2.5 Million purchase price. The asset is recorded at ACTUAL COST, not the appraised or any other valuation.

Transaction #5: Hire sales staff and office support for your business (Executive Assistant, Accounting Clerk, Salesman, Administrative Assistant). Pay the staff for the first month of operations including fringe benefits and taxes.

SG&A is a phrase that stands for Sales, General, and Administrative. These are expenses that are not involved in manufacturing (indirect expenses).

We must book the month’s payroll-related expenses of $16,070 ($7,071 for Sales & Marketing and $8,999 for G&A). These expenses include salaries, wages, insurance, and all other fringe benefits. Issue paychecks to the SG&A employees totaling $8,920.

· On the Income Statement add the total monthly payroll expenses on $7,071 for the Executive Assistant and the Accounting Clerk to General and Administrative expenses.

· Add the payroll expenses of $8,999 for the Salesman and the Administrative Assistant to Sales & Marketing Expense.

· Decrease Retained Earnings in the Balance Sheet by the total SG&A Payroll of $16,070.

· Issue the payroll checks totaling $8,920 and list under CASH DISBURSEMENTS in the Statement of Cash Flows. This should reinforce the importance of Cash to a firm as cash is used to make payroll each month. We must also decrease Cash in the Balance Sheet by the same amount.

· Now the $7,150 due to other parties but not yet payable again goes under ACCRUED EXPENSES in the liability section of the Balance Sheet.

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