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WASHINGTON BANKERS ASSOCIATION
Accounting Basics/Refresher Knowing How Financial Statements are Constructed
Jeffery W. Johnson Bankers Insight Group, LLC [email protected] www.bankers-insight.com 770-846-4511
April 2019
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ACCOUNTING DEFINED
The process of identifying, measuring, and communicating economic information to permit
informed judgments and decisions by the users of the information. (AAA)
Accounting is the “language” employed to communicate financial information.
Accounting is primarily concerned with the design of the system of records, the preparation of
reports based on the recorded data, and the interpretation of the reports.
FUNCTIONS PERFORMED BY ACCOUNTANTS
Observe, identify and measure economic events in financial terms
Record, classify, and summarize measurements of those economic events for conciseness
(using a company’s chart of accounts which is a list of all accounts set up to handle a
company’s accounting transactions. The accounts are numbered in order, usually starting
with 1000 (assets) and continuing through to 9000 (miscellaneous gains and losses)
Report on financial events by preparing financial statements and special reports
Generally accepted accounting principles (GAAP):
The rules financial accountants have to follow when handling accounting transactions and
preparing financial statements. Financial accountants can’t just throw numbers on the income
statement, balance sheet, or statement of cash flows; a level playing field must exist between
businesses so that the individuals reading the financial statements can compare one company to
another.
INFLUENTIAL ORGANIZATIONS
The American Institute of Certified Public Accountants (AICPA)
The AICPA is the world’s largest association representing the accounting profession, with nearly
370,000 members in 128 countries. AICPA members represent many areas of practice, including
business and industry, public practice, government, education and education and consulting;
membership is also available to accounting students and CPA candidates.
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The AICPA sets ethical standards for the profession and U.S auditing standards for audits of
private companies, non-profit organizations, federal, state and local governments. It develops
and grades the Uniform CBA Examination.
Financial Accounting Standards Board (FASB)
Since 1973, the Financial Accounting Standards Board (FASB) has been the designated
organization in the private sector for establishing standards of financial accounting that governs
the preparation of financial reports by nongovernmental entities. Those standards are officially
recognized as authoritative by the Securities and Exchange Commission (SEC) and the American
Institute of Certified Public Accountants.
Such standards are important to the efficient functioning of the economy because decisions about
the allocation of resources rely heavily on credible, concise, and understandable financial
information.
The mission of the FASB is to establish and improve standards of financial accounting and
reporting that foster financial reporting by nongovernmental entities that provides decision-
useful information to investors and other users of financial reports. That mission is accomplished
through a comprehensive and independent process that encourages broad participation,
objectively considers all stakeholder views, and is subject to oversight by the Financial
Accounting Foundation’s Board of Trustees.
The FASB is part of a structure that is independent of all other business and professional
organizations. That structure includes the Financial Accounting Foundation (Foundation), the
FASB, the Financial Accounting Standards Advisory Council (FASAC), the Governmental
Accounting Standards Board (GASB), and the Governmental Accounting Standards Advisory
Council (GASAC).
Governmental Accounting Standards Board (GASB)
The Governmental Accounting Standards Board (GASB) is the independent organization that
establishes and improves standards of accounting and financial reporting for U.S. state and local
governments. Established in 1984 by agreement of the Financial Accounting Foundation (FAF)
and 10 national associations of state and local government officials, the GASB is recognized by
governments, the accounting industry, and the capital markets as the official source of generally
accepted accounting principles (GAAP) for state and local governments.
Accounting and financial reporting standards designed for the government environment are
essential because governments are fundamentally different from for profit businesses.
Furthermore, the information needs of the users of government financial statements are
different from the needs of the users of private company financial statements. The GASB
members and staff understand the unique characteristics of governments and the environment
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in which they operate.
The GASB is not a government entity; instead, it is an operating component of the FAF, which is
a private sector not-for-profit entity. Funding for the GASB comes in part from sales of its own
publications and in part from state and local governments and the municipal bond community. Its
standards are not federal laws or regulations and the organization does not have enforcement
authority. Compliance with GASB’s standards, however, is enforced through the laws of some
individual states and through the audit process, when auditors render opinions on the fairness of
financial statement presentations in conformity with GAAP.
Securities and Exchange Commission (SEC)
The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain
fair, orderly, and efficient markets, and facilitate capital formation.
The SEC oversees the key participants in the securities world, including securities exchanges,
securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned
primarily with promoting the disclosure of important market-related information, maintaining
fair dealing, and protecting against fraud.
Crucial to the SEC's effectiveness in each of these areas is its enforcement authority. Each year
the SEC brings hundreds of civil enforcement actions against individuals and companies for
violation of the securities laws. Typical infractions include insider trading, accounting fraud, and
providing false or misleading information about securities and the companies that issue them.
Though it is the primary overseer and regulator of the U.S. securities markets, the SEC works
closely with many other institutions, including Congress, other federal departments and agencies,
the self-regulatory organizations (e.g. the stock exchanges), state securities regulators, and
various private sector organizations. In particular, the Chairman of the SEC, together with the
Chairman of the Federal Reserve, the Secretary of the Treasury, and the Chairman of the
Commodity Futures Trading Commission, serves as a member of the President's Working Group
on Financial Markets.
ACCOUNTING ASSUMPTIONS
Accounting principles and assumptions are the essential guidelines under which businesses
prepare their financial statements. These principles guide the methods and decisions for a
business over a short and long term. For both internal and external reporting purposes, it is
important to understand the concepts presented below because they serve as a guideline to the
analysis of financial reporting issues.
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Economic Entity Assumption
Under the economic entity assumption, an economic activity can be identified to a separate entity
accountable for that activity. In other words, this assumption states that businesses must keep
their transactions separate from their owners’, business units’ or other businesses’ transactions.
For example, the business activities of the neighborhood coffee house are to be kept separate
from the financial activities of its owners or managers. The financial statements for the coffee
house will only reflect the revenue and expenses for the coffee house. Thus, it is possible to
compare the financial statements of this coffeehouse with its competitors’ reports, since these
statements should be reported separately under the economic entity assumption. Important to
note, a separate entity does not necessary mean a legal entity. For example, financial statements
for a parent company and its subsidiaries (i.e. separate legal entities) can be presented together
(i.e. consolidated financial statements).
Revenue Recognition Principle
Under this principle revenue is to be recorded when it is realized (or realizable), and when it is
earned and not when it is received. Revenue is realized when goods or services are exchanged, is
realizable when assets received can be converted to cash, and is earned when all necessary
requirements are met entitling the company to the benefits represented by the revenue (e.g.
services performed).
For example, suppose a neighborhood coffee house orders 100 coffee mugs from a coffee
wholesaler in June. The coffee house takes delivery of the new mugs in July and pays for the
order in August. The wholesaler does not recognize the revenue from this sale in June, when the
order was placed, or in August, when the cash was received. For recording purposes, the
revenue is recognized by the wholesaler in July, when the coffee mugs were delivered to the
coffeehouse.
This principle is used for the recognition of revenue for both goods and services. For example, if
an attorney is hired with an agreed upon retainer fee of $2,500 in May, and the services are not
performed until July, the attorney does not recognize the revenue until July. The attorney must
earn the income before it can be recorded as such, even though he/she received cash for the
service at an earlier date.
Historical Cost Principle
The historical cost principle deals with the valuation of both assets and liabilities. The value at
the time of acquisition is used to value most assets and liabilities. For example, say the coffee
wholesaler purchased an office building in 1990 for $1.2 million. Over time this asset has most
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likely appreciated in value. However, in accordance with the cost principle, the original
(historical) price of the building is what is recorded as the cost of the building in the books of the
business.
Note that another basis for valuing elements of financial statements is coming into play. The
new basis is fair value. With the convergence of global standards, fair value is used more in the
United States to value elements of financial statements.
Matching Principle
This principle mandates that the expenses of a business need to line up with its revenue. The
expense or cost of doing business is recorded in the same period as the revenue that has been
generated as the result of incurring that cost. In the case of the coffee wholesaler, when the 100
coffee mugs were delivered in July they changed from being a part of inventory (asset) to a cost
of goods sold entry (expense) in the month that the revenue from the sale was recognized. At
this point, the difference between the revenue and expense is determined as the gross profit from
the sale.
Full Disclosure Principle
This principle states that all past, present and future information that may have had an impact on
the financial performance of the company needs to be fully disclosed. The historical
performance of a company is readily available, but examining the numbers does not always
provide the entire financial picture of a company. Sometimes there are alternative situations that
need to be reported. Pending or current lawsuits are one example of a transaction that could
severely impact a company’s bottom line. In addition, incomplete financial transactions or any
other conditions that could impact the company’s performance must also be disclosed. Most of
these transactions are disclosed in the footnotes to the financial statements.
Money Measurement
Economic activity is initially recorded and reported in terms of a common unit of
measure (US dollar).
Continuity or Going Concern
The entity is assumed to have an indefinite life unless strong evidence exits to the
contrary.
Periodicity
An entity’s life can be subdivided into time periods for purposes of reporting its
economic activities.
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l F
AS
B C
od
ific
atio
n T
opic
Accounting S
tand
ard
G
enera
l F
AS
B C
od
ific
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n T
opic
Accounting S
tand
ard
Genera
l F
AS
B C
od
ific
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n T
opic
FA
S 5
A
SC
450
Con
tin
ge
ncie
s
FA
S 1
15
A
SC
320
In
ve
stm
en
ts—
De
bt
an
d E
qu
ity
Se
cu
ritie
s
FA
S 1
41
(R)
AS
C 8
05
Bu
sin
ess C
om
bin
atio
ns
FA
S 1
65
A
SC
855
Su
bse
que
nt E
ve
nts
FA
S 1
3A
SC
840
Le
ase
sF
AS
12
3(R
) A
SC
718
Com
pe
nsation
—S
tock C
om
pen
sa
tion
FA
S 1
42
AS
C 3
50
In
tan
gib
les—
Go
od
will
an
d O
the
r F
AS
16
8A
SC
105
Ge
ne
rally
Acce
pte
d A
cco
untin
g
Prin
cip
les
FA
S 5
2A
SC
830
Fo
reig
n C
urr
en
cy M
att
ers
FA
S 1
28
A
SC
260
Ea
rnin
gs P
er
Sh
are
F
AS
14
3
AS
C 4
10
Asse
t R
etire
me
nt
an
d E
nviro
nm
en
tal
Ob
liga
tio
ns
AR
B 5
1 /
FIN
46
(R)
/ F
AS
160
/
FA
S 1
67
***
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C 8
10
Con
so
lida
tion
FA
S 5
7A
SC
850
Re
late
d P
art
y D
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su
res
FA
S 1
30
A
SC
220
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pre
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nco
me
FA
S 1
44
A
SC
360
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rty,
Pla
nt,
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qu
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323
In
ve
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ity M
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Ve
ntu
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, a
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6
AS
C 7
15
Com
pe
nsation
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etire
me
nt B
en
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FA
S 1
31
A
SC
280
Se
gm
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t R
ep
ort
ing
FA
S 1
46
A
SC
420
Exit o
r D
isp
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l C
ost
Ob
liga
tio
ns
AP
B 2
8A
SC
270
In
terim
Re
port
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FA
S 9
5A
SC
230
Sta
tem
en
t of
Ca
sh
Flo
ws
FA
S 1
33
A
SC
815
De
riva
tive
s a
nd
Hed
gin
g
FA
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50
A
SC
480
Dis
tin
gu
ish
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rom
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ity
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9
AS
C 8
45
Non
Mo
ne
tary
Tra
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rs
FA
S 1
09
/ F
IN 4
8
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40
In
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e T
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s
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40
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16
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AS
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60
Tra
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Se
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FA
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57
A
SC
820
Fa
ir V
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e M
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460
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ara
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se
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ss-R
efe
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ce
To
ol in
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mp
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or
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cific
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n w
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ith
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e C
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ific
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.
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AS
16
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t b
een
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ifie
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nticip
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da
rd w
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rim
arily
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co
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as n
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It is a
nticip
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d t
ha
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tan
da
rd w
ill b
e p
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arily
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nso
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00
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terh
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rs L
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. A
ll righ
ts r
ese
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“Price
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fers
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wa
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ope
rs L
LP
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ela
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re lim
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lia
bili
ty p
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hip
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r, a
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he
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ach
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wh
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se
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pen
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nt le
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8
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prim
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tern
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catio
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ss-R
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ompe
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ilson
whe
reth
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iors
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tem
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260
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305
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Fina
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946-
305
Fina
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lSer
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vest
men
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pani
es
310
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310-
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ther
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942-
310
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944-
310
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946-
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320
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942-
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944-
320
Fina
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946-
320
Fina
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323
Inve
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942-
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942-
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and
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944-
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946-
405
Fina
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440
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440-
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9
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Acco
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nanc
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men
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prim
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Com
perio
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tern
alA
AS
Dda
taba
se.
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ble
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epr
imar
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catio
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prio
rsta
ndar
dsw
ithin
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Cod
ifica
tion.
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the
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ss-R
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ompe
riofo
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ilson
whe
reth
epr
iors
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ards
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ithin
the
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road
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815-
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ty81
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944-
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820
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dD
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820-
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s—Br
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san
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stru
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942-
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944-
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atem
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nanc
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stm
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ompa
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10
BUSINESS ACTIVITIES
Manufacturing Companies
Buy raw materials and convert them into finished goods to be sold to the end user
Wholesaling Companies
Purchase goods that are ready for re-sell or requiring some assembling then sold to the
end user, usually retailers
Retailing Companies
Purchase goods that are ready for sale and then reselling them to retail customers
Service Companies
Provides a service for a fee
Financial Statement Components
OPINION
BALANCE SHEET
INCOME STATEMENT
STATEMENT OF RETAINED EARNINGS
STATEMENT OF CASH FLOWS
FINANCIAL NOTES
11
TYPES OF AUDIT OPINION LETTERS
UNQUALIFIED OPINION
In rendering an Unqualified Opinion, the auditor is saying that all financial information that was
available, in order and met all auditing standards. After closing the examination, the auditor did
not have major concerns or serious unanswered questions. For a company’s management team,
this opinion is the equivalent of receiving a gold star.
UNQUALIFIED OPINION WITH EXPLANATORY LANGUAGE ADDED
In such a case, the audit is still Unqualified, but the auditor felt it was necessary to add certain
explanatory language to their report. Doing so is not regarded as a qualification. The auditors
could be pointing out some inconsistency in applying accounting principles or mentioning an
uncertainty that could have a material impact on the company’s financial statements
QUALIFIED OPINION
An auditor will write this type of letter to management when most of the company’s financial
statements are in order and meet auditing standards, with the exception of one or more accounts
or transactions. The accounts or transactions in question will be named in the opinion letter.
The financial information provided to the auditor was not complete or the company’s accounting
methods do not follow Generally Accepted Accounting Principles.
DISCLAIMER OF OPINION
When an auditor is not able to express an opinion, it is generally because the company did not
provide sufficient financial information for an audit. Opinion letters with such a disclaimer are
relatively rare, but they may be viewed as indications that the company refused to cooperate with
the auditor after engaging their services. Such a letter casts doubt on the quality of the company
and its management
ADVERSE OPINION
This is a failing grade. The auditor is saying that the financial statements are not accurate or
complete. The statements do not present the company’s financial position or results in
accordance with Generally Accepted Accounting Principles. Such as opinion letter is a warning
that the financial statements do not give a fair view of the company
12
AB & C, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditor’s Report
To the Stockholders and Board of Directors
Acc Manufacturing (“The Company”)
We have audited the accompanying balance sheets of The Company (an S-Corporation) as of
December 31, 2012 and 2011, and the related statements of operations and retained earnings
and cash flows for the years then ended. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with general accepted auditing standards. Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of The Company as of December 31, 2012 and 2011, and the
results of its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Supplementary Schedules I-III are
presented for purposes of additional analysis and are not a required part of the basic financial
statements. Such information has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, is fairly presented in all material
respects in relation to the basic financial statements taken as a whole.
AB & C, P.C.
January 10, 2013
13
The Accounting Firm of
DEWEY, CHEATUM & HOWE
INDEPENDENT AUDITORS REPORT
To the Board of Directors
We have audited the accompanying balance sheets of __________________________ of December 31,
2015 and 2014, and the related statements of income and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States
of America. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts a disclosure in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, generally accepted accounting principle require that
variable interest entities be consolidated into the financial statements of the primary beneficiaries.
Management has informed us that the Company has not consolidated a certain variable interest entity
in these financial statements. The effect of this departure from generally accepted accounting principles
on the financial position, results of operations, and cash flows have not been determined.
In our opinion, except for the effects of not consolidating the variable interest entity as discussed in the
preceding paragraph, the financial statements referred to in the first paragraph present fairly, in all
material respects, the financial position of Byrd Maintenance Services, Inc. as of December 31, 2015 and
2014, and the results of its operations and its cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
Our audits were conducted for the purpose of expressing an opinion on the basic financial statements
take as a whole. The accompanying supplemental schedule is presented for purposes of additional
analysis and is not a required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audit of the basic financial statements and in our
opinion is fairly dated in all material respects in relation to the basic financial statements taken as a
whole.
14
The Accounting Firm of
DEWEY, CHEATUM & HOWE
INDEPENDENT ACCOUNTS REVIEW REPORT
To the Board of Directors
We have reviewed the accompanying consolidated balance sheets of ___________________________
and subsidiary as of December 31, 2015 and 2014, and the related consolidated statements of income,
partners’ capital and cash flows for the years then ended. A review includes primarily applying analytical
procedures to management’s financial data and making inquiries of company management. A review is
substantially less in scope than an audit, the objective of which is the expression of an opinion regarding
the consolidated financial statements as a whole
15
16
RU
LES
OF
DEB
ITS
& C
RED
ITS
ASS
ETS
= LI
AB
ILIT
IES
+ ST
OC
KH
OLD
ERS'
EQ
UIT
Y
Ass
et A
ccou
nts
=
Liab
ility
Acc
ount
s+
Stoc
khol
ders
' Equ
ity A
ccou
nts
De
bit*
Cre
dit
De
bit
Cre
dit*
De
bit
Cre
dit*
De
bit
Cre
dit
De
bit
Cre
dit
De
bit
Cre
dit
for
for
for
for
for
for
Incre
ase
De
cre
ase
De
cre
ase
Incre
ase
De
cre
ase
Incre
ase
Cos
t & E
xpen
se A
ccou
nts
Rev
enue
Acc
ount
s
De
bit*
Cre
dit
De
bit*
Cre
dit*
De
bit
Cre
dit
De
bit
Cre
dit
for
for
for
for
Incre
ase
De
cre
ase
De
cre
ase
Incre
ase
DE
BIT
SC
RE
DIT
S
Incre
ase
Asse
tsD
ecre
ase
Asse
ts
De
cre
ase
Lia
bili
tie
sIn
cre
ase
Lib
ilitie
s
De
cre
ase
Sto
ckh
old
ers
' Eq
uity
Incre
ase
Sto
ckh
old
ers
' Eq
uity
De
cre
ase
Re
ve
nu
es
Incre
ase
Re
ve
nu
es
Incre
ase
Exp
en
se
sD
ecre
ase
Exp
en
se
s
Incre
ase
Div
ide
nd
sD
ecre
ase
Div
ide
nd
s
*No
rma
l B
ala
nce
17
Recording Transactions in T-Accountsand Computing Balance in Each Account
Transactions for March 2013
From Sale of Asset
March 1:
March 3:
March 5:
March 10:
March 14:
March 15:
March 18:
March 20:
March 25:
March 26:
March 30:
March 31
March 31: & Income Statement
Stockholders invested $50,000 cash to start business.
Paid $1,200 to rent building for three months from this date.
Purchased and financed a delivery truck for $46,000 with bank.
Performed delivery services for a customer for $5,000 cash.
Paid one-half of amount due on delivery truck.
Added a special lift to the truck for $8,000 installed by vendor on account
Billed a customer $4,000 for delivery services performed.
Paid salaries for the month, $2,000.
Collected $2,500 of amount due from a customer.
Quarterly Depreciation Expense on Truck for $1,500
Sold Truck for $5,000 in cash for book value
Paid the remainding balance due on the truck
Close the books for the month and prepare a Balance Sheet
Depreciation
(DR) Exp. (CR)
Accumulated
(DR) Dep. (CR)
Gain/Loss
(DR) (CR)
(DR) Cash (CR)
Accounts (DR) Rec. (CR)
Prepaid
(DR) Rent (CR)
(DR) Truck (CR)
Notes
(DR) Pay. (CR)
Accounts
(DR) Pay (CR)
Capital
(DR) Stock (CR)
Delivery Service
(DR) Sales (CR)
Operating
(DR) Exp. (CR)
18
CASE STUDY
The business transactions occurred recently. Please record these economic transaction onto the books
of Bulldog-Tech Manufacturing using the enclosed journal worksheet. The first journal worksheet
contains accounts representing the asset section of the balance sheet while the second journal
worksheet represents accounts found on the liabilities, capital and income statement portion of a
statement. As you read each transaction below, please record the financial event onto the worksheet
insuring you are debiting and crediting the proper accounts. Indicate debits and credits utilizing either
a plus or negative sign. Also, be mindful of the Accounting Equation (Assets = Liabilities + Net Worth),
which means that each transaction recorded should result in this Equation remaining in balance.
After all transactions are entered, total each column at the end of the worksheet journals for each
account and transfer the information into the 2015 column of the balance sheet and income statement
for the company. The goal of this case study is to produce a balance sheet that balances. (A=L+NW),
Good Luck!
A Purchased 400 units of inventory @ $90 each on account $36,000
B Made payment on Credit Line ($10,000 Prin. & $5,000 Int) $15,000
C Purchased 300 units of Inventory @ $95 each on account $28,500
D Sold 1,000 units @ $120 per unit on account. The Company
utilizes the FIFO (First In First Out) inventory costing method $120,000
E Depreciation of Building, Machinery and Equipment $14,800
F Management established an Allowance for Doubtful Accounts $10,000
G Paid principal payment of Long Term Debt $5,833
H Received cash from customer's account $65,000
I Paid creditors for inventory purchased $23,000
J Paid license taxes in advance $4,800
K Incurred Rent Expense but did not pay it $3,330
L Charged off account due from ABC Company $5,000
M Sold equipment for $9,000 cash, which is $2,000
in excess of its book value, Accumulated Dep is $7,000 $10,000
N Declared a Dividend but did not pay it $30,000
19
BU
LLD
OG
-TEC
H M
ANU
FAC
TUR
ING
ASSE
TS
Acco
unts
(Allo
wan
ce)
Land
&M
achi
nery
&Au
tos
&Fu
rnitu
re &
Accu
mul
.Pr
epai
dC
ash
Rec
eiva
ble
For D
oubt
.In
vent
ory
Bui
ldin
gEq
uipm
ent
Truc
kFi
xtur
esD
epre
ciat
ioEx
pens
es
BEG
100,
000
32
,000
85
,600
55
0,00
0
275,
500
7,
500
5,
000
10
,000
1,
065,
600
A B C D E F G H I J K L M N
END
-
20
BU
LLD
OG
-TEC
H M
ANU
FAC
TUR
ING
LIAB
ILIT
IES,
CAP
ITAL
& IN
CO
ME
STAT
EMEN
T
Acco
unts
Not
esAc
crue
dC
urre
nt P
ort
Div
iden
dLo
ng-T
erm
Rev
enue
&C
ost o
fO
pera
ting
Paya
ble
Paya
ble
Expe
nses
of L
ong
T/D
Paya
ble
Deb
tC
apita
lG
ains
Goo
ds S
old
Expe
nses
BEG
67,0
0050
,000
23,0
0070
,000
549,
000
306,
600
1,06
5,60
0
A B C D E F G H I J K L M N
END
21
2014 % 2015
CURRENT ASSETS:
Cash 100,000$
Accounts Receivable, Net 32,000
Inventory (1,000 units @ $85.60 each) 85,600
Prepaid Expenses 10,000
Notes Receivable - Current Portion 0
Total Current Assets 227,600
PROPERTY, PLANT AND EQUIPMENT
Land & Building 550,000
Machinery & Equipment 275,500
Autos & Trucks 7,500
Office Furniture & Fixtures 5,000
838,000
Less Accumulated Depreciation 0
Net Property, Plant & Equipment 838,000
Total Assets 1,065,600
LIABILITIES
Notes Payable - Bank 50,000
Accounts Payable 67,000
Current Portion of Long Term Debt 70,000
Accrued Expenses 23,000
Dividend Payable
Total Current Liabilities 210,000
Long Term Debt 549,000
Total Liabilities 759,000$
Common Stock 150,000
Capital Surplus
Retained Earnings 156,600
Total Net Worth 306,600 -
Total Liabilities and Net Worth 1,065,600$ -$
NET WORTH
Bulldog-Tech Manufacturing, Inc.Balance Sheet
As of December 31
ASSETS
22
2015
Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses:
Selling Expenses
Administrative
Expenses
Total Operating
Expenses
Income From
Operations
Other Income and
(Expense)
Net Income
Bulldog-Tech Manufacturing, Inc.Statement of Operations and Retained Earnings
For the Years Ended December 31,
23
Balance Sheet
Reflects a firm’s solvency. It reports a firm’s assets, liabilities and stockholders’ equity (aka
net worth and capital) as of a specific moment in time.
ASSETS
– Things of value, which are owned by the business such as cash, accounts
receivable, inventory and equipment
LIABILITIES
– Debts owed by the firm such as notes payable, accounts payable, etc.
STOCKHOLDERS’ EQUITY
– The owners interest in the business. It consists of owners’ investments or
withdrawals, profits made which have not been withdrawn or losses incurred.
Profits and losses are combined in an account called Retained Earnings.
Income Statement
Reports a firm’s profitability for a stated period of time. Profitability is measured in a
given period by comparing the revenues generated with costs and expenses incurred to
produce those revenues.
Statement of Cash Flows
Shows the cash inflows and cash outflows from operating activities, investing activities and
financing activities.
OPERATING ACTIVITIES
– Generally includes the cash effects of transactions and other events that enter into
the determination of net income. It is the cash generated or used in producing
profits or losses
INVESTING ACTIVITIES
– Generally include the cash effects of transactions involving the acquisition or
disposal of fixed assets
FINANCING ACTIVITIES
– Generally include the cash effects of transactions and other events involving
creditors and owners
24
ACCOUNTING EQUATIONS
Assets = Liabilities + Stockholders’ Equity
Assets – Liabilities = Stockholders’ Equity
The equation must always be in balance.
Determine the missing amount for each of the following
ASSETS = LIABILITIES + OWNER’S EQUITY
a) _______ = $20,000 + $41,500
b) $32,700 = _______ + $10,000
c) $ 7,000 = $18,000 + _______
25
HOW THE INCOME STATEMENT AND BALANCE SHEET ARE RELATED
Economic events will typically start through an entry onto the Income Statement and the results
of that event will find its way to the Balance Sheet. In other words, whatever occurs on the
Income Statement will end up on the Balance Sheet.
Another perspective is that the Balance Sheet is the end results of what occurred on the Income
Statement. Using the chart below, match the items on the Income Statement with the
corresponding Balance Sheet Account shown below the chart. This will strengthen your
understanding of the Income Statement / Balance Sheet relationship and should enhance your
understanding of Ratio and Cash Flow Analysis.
Income Statement Balance Sheet
Sales ___________________
___________________
Cost of Goods Sold ___________________
___________________
Operating Expenses ___________________
___________________
Interest Expense ___________________
Interest (Investment) Income ___________________
Non-Operating Exp. →→→→ ______________
Income Tax Expense __________________
Profit →→→→ ______________
Loss →→→→ ______________
Dividend Declared __________________
Accounts Receivable Current Portion of Long Term Debt
Inventory Other Liabilities
Income Tax Payable Dividend Payable
Notes Payable Interest Payable
Accrued Expenses Cash
Accounts Payable Retained Earnings
Pre-Paid Expenses Investments
26
INTERPRETATION OF FINANCIAL STATEMENTS
BALANCE SHEET ANALYSIS
The balance sheet is a picture of a company at a given point in time. The balance sheet identifies
all assets, liabilities and net worth of a company. The accounting or balance sheet equation is:
Assets = liabilities + net worth.
Assets consist of current assets, fixed assets, intermediate assets and other assets as follows:
CURRENT ASSETS CURRENT LIABILITIES
Cash Short Term Notes Payable
Marketable Securities Line of Credit
Accounts Receivable Current Portion of LTD
Allowance for Doubt Account (Contra Account) Accounts Payable
Inventory Accrued Expenses
Pre-paid Expenses Income Tax Payable
Income Tax Refund
FIXED ASSETS LONG TERM DEBT
Land Long Term Notes Payable
Buildings Mortgage Payable
Equipment Deferred Taxes
Furniture & Fixtures Due to Officers
Leasehold Improvements
Operating Leases
Capital Leases
Accumulated Depreciation (Contra Account)
OTHER ASSETS NET WORTH
Due from Stockholders Common Stock
Employee Advances Preferred Stock
Due from Related Companies Paid-In-Capital (Surplus)
Other Receivables Retained Earnings
Deposits Treasury Stock
Intangibles
Deferred Assets
Investments
Other Non-Operating Assets
27
INCOME STATEMENT ANALYSIS
The income statement shows the amount of sales/revenues generated and cost/expenses incurred.
The bottom line of an income statement indicates whether the entity earned a profit or incurred a
loss. Unlike a balance sheet, which captures the value of assets, liabilities and net worth at a
specific point in time, the income statement captures activity over a period of time. The business
has generated revenues from sales and paid total expenses. The typical income statement is
structured as follows:
Sales
- Cost of Goods Sold
= Gross Profit
- Operating expenses (selling expenses, general and administrative expenses)
= Operating income
- Non-operating expenses (interest expense, other nonrecurring expenses)
+ Non-operating income (interest income, other nonrecurring income)
= Net income before tax
+ Taxes
= Net profit after tax
28
Sales Cash
Accounts Receivable
When Sales are experienced, there are two possible outcomes as a result of those Sales that will
affect the Balance Sheet. If cash is collected from the sale, then Cash will increase. Conversely,
if cash is not collected from the sale at the point of the sale, then it creates and account called
Accounts Receivable. So in fact, the Income Statements causes items on the Balance Sheet to
appear.
Cost of Goods Sold Inventory
Accounts Payable
The Cost of Goods Sold account is usually affected when sales occur. Cost of Goods Sold will
affect the Inventory levels on the Balance Sheet. In fact, Inventory becomes Cost of Goods Sold
when it is sold. Keep in mind that Cost of Goods Sold also includes any costs directly involved
to produce the sales such as Labor, Freight Cost, Overhead Expenses, etc.
Cost of Goods Sold is also related to Accounts Payable because if the Inventory that is sold has
not been paid for, that owing will flow into another Balance Sheet account called Accounts
Payable.
Operating Expenses Accrued Expenses
Pre-Paid Expenses
Operating Expenses incurred during operations that are not paid will flow to the Balance Sheet
and create a liability account called Accrued Expenses. So in fact, Accrued Expenses are unpaid
Operating Expenses. Occasionally, companies will pay Operating Expenses in advance of their
use. When this occurs, an asset called Pre-Paid Expenses is created. An example of this occurs
when a company pays 6 months of lease payments to rent its office space in advance. As each
month passes, the company utilizes 1/6 of the Pre-Paid Expense. The accounting transaction to
reflect this event is an increase to Operating Expense (Leases) and a reduction of Pre-Paid
Expenses.
Interest Expense Interest Payable
Interest Expense incurred during operations that are not paid will flow to the Balance Sheet and
create a liability account called Interest Payable. So in fact, Interest Payable are unpaid Interest
Expense.
Interest (Investment) Income Investments
When Interest or Investment Income is earned but not collected, the cash that is due is
accumulated in the asset account that relates to the Investment. For example, if additional cash is
earned from a Whole Life Insurance Policy but is not collected, the amount earned will increase
an asset account named Cash Value in Life Insurance or it could appear in a general Investment
account.
29
Income Tax Expense Income Tax Payable
Income Tax Expense incurred during operations that are not paid will flow to the Balance Sheet
and create a liability account called Income Tax Payable. So in fact, Income Tax Payable are
unpaid Income Taxes.
Dividend Declared Dividend Payable
Dividends Declared but not yet paid will create a liability account to appear called Dividend
Payable. So in fact, Dividend Payable represents unpaid Dividends that have been declared but
not yet paid.
30
BENEFITS OF UNDERSTANDING THE INC. STATE. / BAL. SHEET RELATIONSHIP
I have encountered many Credit Analysts and Commercial Lenders who are outstanding in
calculating financial ratios and cash flow but when asked to interpret the meaning of each ratio
or the outcome of the Cash Flow statement, they cannot begin to tell you their meaning. One
primary reason for this is due to not understanding the relationship between the items on the
Income Statement and Balance Sheet and the reasons why certain items are matched
mathematically to calculate ratios. If you master the relationship connection, it will enhance
your ability to calculate, interpret and explain the results of financial analysis.
LIQUIDITY (ACTIVITY RATIOS)
Accounts Receivable Turnover: When determining the A/R turnover, we match Sales with
Accounts Receivable because they are related. That is, Sales become Accounts Receivable if the
Sales are not collected. So it makes sense for these two items to be used mathematically in
calculating the turnover rations
Inventory Turnover: When determining the Inventory turnover, we match Cost of Goods Sold
with Inventory they are related. That is, Inventory becomes Cost of Goods Sold when inventory
is sold. So it makes sense for these two items to be used mathematically in calculating the
turnover ratios.
Accounts Payable Turnover: When determining the Accounts Payable turnover, we match Cost
of Goods Sold with Accounts Payable they are related. That is, Inventory becomes Cost of
Goods Sold when inventory is sold and if that Inventory cost has not been paid, it becomes
Accounts Payable. So it makes sense for these two items to be used mathematically in
calculating the turnover ratios.
CASH FLOW
Perhaps the most important reason for understanding the relationship between the Income
Statement and the Balance Sheet is the benefit of knowing the impact on cash flow. For
example, how do we answer the question of the amount of cash collected from sales? Or how
much did the company pay for the Cost of Goods Sold and Operating Expenses during the year?
Answers to these questions can be obtained by understanding the Income Statement and Balance
Sheet relationship. Below are the keys to understanding how much cash is generated or used
from changes in the financial statements;
Sales Cash
Accounts Receivable
To determine how much cash is collected from Sales, we need to know the change in Accounts
Receivable over the period being measured. Why? Because uncollected Sales become Accounts
Receivable and an increase in A/R means that everyone who were the recipient of a sale did not
31
pay for the items purchased therefore, an increase in A/R represents a use of cash (a decrease
represents a source of cash).
Cost of Goods Sold Inventory
Accounts Payable
How do you determine how much cash a company paid for the Inventory that was purchased and
/ or sold? The answer can be obtained by measuring the change in Accounts Payable. Why?
Because unpaid Inventory/Cost of Goods Sold will show up in the Accounts Payable account
therefore, an increase in A/P represents a source of cash (a decrease represents a use of cash)
Operating Expenses Accrued Expenses
How do you determine how much cash a company paid for their Operating Expenses that were
incurred? The answer can be obtained by measuring the change in Accrued Expenses. Why?
Because unpaid Operating Expenses will show up in the Accrued Expense account therefore, an
increase in Accrued Expenses represent a source of cash (a decrease represents a use of cash).
Interest Expense Interest Payable
How do you determine how much cash a company paid for the Interest Expense that was
incurred? The answer can be obtained by measuring the change in Interest Payable. Why?
Because unpaid Interest will show up in the Interest Payable account therefore, an increase in
Interest Payable represents a source of cash (a decrease represents a use of cash).
Income Tax Expense Income Tax Payable
How do you determine how much cash a company paid against their Income Taxes that were
incurred? The answer can be obtained by measuring the change in Income Taxes Payable. Why?
Because unpaid Income Taxes will show up in the Income Tax Payable account therefore, an
increase in Income Tax Payable represents a source of cash (a decrease represents a use of cash).
Dividend Declared Dividend Payable
How do you determine how much cash a company paid out in Dividends that were declared? The
answer can be obtained by measuring the change in Dividend Payable. Why? Because unpaid
Dividends will show up in the Dividend Payable account therefore, an increase in Dividend
Payable represents a source of cash (a decrease represents a use of cash).
32
Accounts Receivable Aging Schedule
DARCY COMPANY
Accounts Receivable Aging Schedule
December 31, 2011
Number of Days Past Due
Customer
Account
Receivable
Balance
Not Yet
Due 1-30 31-60 61-90 Over 90
X $5,000 $5,000
Y $14,000 $12,000 $2,000
Z $400 $200 $200
All others $808,600 $560,000 $240,000 $2,000 $600 $6,000
Estimated
uncollectible
percentage
$828,000 $560,000
1%
$252,000
5%
$4,000
10%
$800
25%
$11,200
50%
Estimated
amount
uncollectible
$24,400 $5,600 $12,600 $400 $200 $5,600
Setting up an Allowance for Doubtful Accounts:
Sales: $1,000,000
Historical Losses: 1% of Sales
Bad Debt Expense 10,000
Allowance for Doubtful Accounts 10,000
Gross A/R 250,000 245,000
Less:ADFA 10,000 5,000
Net A/R 240,000 240,000
Allowance for Doubtful Accounts 5,000
Accounts Receivable 5,000
Balance in the
accounts
receivable
account in the
general ledger
Desired credit balance in
the allowance for
uncollectible accounts
33
INVENTORY
COMPARISON OF COSTING METHODS
FIFO LIFO
SALES $12,000 $12,000
Less: Cost of Goods Sold
Opening Inventory -0- -0-
+ Purchases:
500 units @ $8 4,000 4,000
200 units @ $9 1,800 1,800
400 units @ $10 4,000 4,000
600 units @ $11 6,600 6,600
Total Goods Available for
Sale
16,400 16,400
Less: Ending Inventory (7,600) (5,800)
= Cost of Goods Sold (8,800) (10,600)
Gross Profit 3,200 1,400
Less: Income Taxes (960) (420)
= Net Profit $2,240 $980
600 Units @ $11 = $6,600
100 Units @ $10 = $1,000
$7,600
500 Units @ $8 = $4,000
200 Units @ $9 = $1,800
$5,800
34
Determining Ending Inventory Under Weighted-Average Method Using
Perpetual Inventory Procedure
Purchased Sold Balance
Date Units
Unit
Cost Total Units Unit Cost Total Units
Unit
Cost Total
Beg. Inv. 10 $8.00 $80.00 A new unit cost is
Mar. 2 10 $8.50 $85 20 8.25
a
165.00 calculated after each
Mar. 10 10 $8.25 $82.50 10 8.25 82.50 purchase.
May 28 20 8.40 168 30 8.35
b
250.50
July 14 20 8.35 167.00 10 8.35 83.50
Aug. 12 10 9.00 90 20 8.675
c
173.50 The unit cost of sales
Sept. 7 10 8.675 86.75 10 8.675 86.75 is the most recently
Oct. 12 20 8.80 176 30 8.758
d
262.75 calculated unit cost.
Nov. 22 20 8.758 175.17* 10 8.758 87.58
Dec. 21 10 9.10 91 20 $8.929
e
$178.58 Balance of $178.58
would agree with
balance already
a $165.00 / 20 = $8.25 existing in the
b $250.50 / 30 = $8.35 merchandise
c $173.50 / 20 = $8.675 inventory account.
d $262.75 / 30 = $8.758
e $178.58 / 20 = $8.929
* Rounding difference
35
Beginning inventory
+ Raw Material
+ Labor Costs
+ Manufacturing Overhead
= Cost of goods available for sale
- Work in Process
- Ending Inventory
`
= Cost of Goods Sold
The cost of goods sold for wholesalers and retailers is calculated as follows:
Beginning inventory
+ Purchases of Finished Products
- Less Ending Inventory
=Cost of Goods Sold
36
Summary of Depreciation Methods
Method Base Calculation
Straight-line Asset _ Estimated
cost salvage value
________base
Number of years of useful life
Units-of-production Asset _ Estimated
cost salvage value
Base x units produced this period
Estimated total units of production
Sum-of-the-years’-digits Asset _ Estimated
cost salvage value
Base x number of years of useful life
remaining at beginning of accounting
period_
SOYD
Double-declining-balance Asset _ Accumulated
cost depreciation
Base x (2 x Straight-line rate)
37
ILLUSTRATION
Comparison of Straight-line, Sum-of-the-Years' Digits and Double-Declining-Balance Depreciation Methods
Straight-Line Method
Sum-of-the-Years'-Digits Method
Double-Declining-Balance Method
38
CASE STUDY
On October 1, 2015, Jay Johnson established a business enterprise. The transactions of the business
for the three months ending December 31, 2015 are summarized below:
A Invested capital into the business $300,000
B Purchased a business called Ace Wholesale Company as follows:
Assets Acquired
Accounts Receivable $32,000
Inventory (1,000 units @ $85.60 each) $85,600
Prepaid Expenses $10,000
Land & Building $550,000
Machinery & Equipment $275,500
Truck Supplies $7,500
Office Supplies $5,000
Total Assets $965,600
Liabilities
Accounts Payable $67,000
Notes Payable to Bank $50,000
Accrued Expenses $23,000
Current Portion of Long Term Debt $70,000
Long Term Debt $549,000
Cash Required of which half came from Outside Investors $206,600
Total Liabilities & Capital $965,600
C Purchased 400 units of inventory @ $90 each on account $36,000
D Made payment on Credit Line ($10,000 Prin. & $5,000 Int) $15,000
E Purchased 300 units of Inventory @ $95 each on account $28,500
F Sold 1,000 units @ $120 per unit on account. The Company
utilizes the FIFO (First In First Out) inventory costing method $120,000
G Depreciation of Building, Machinery and Equipment $14,800
H Management established an Allowance for Doubtful Accounts $10,000
I Paid principal payment of Long Term Debt $5,833
J Received cash from customer's account $65,000
K Paid creditors for inventory purchased $23,000
L Paid license taxes in advance $4,800
M Paid insurance premiums in advance $1,360
N Utilized Line of Credit to pay Salaries & Wages $4,700
O Incurred Rent Expense but did not pay it $3,330
P Paid Utilities Expense $1,050
Q Utilized a portion of Equipment Supplies $1,350
R Owner withdrew funds out of the company $18,000
39
S Taxes expiring against prepaid account $1,200
T Cancelled Insurance Policy with 3 months remaining $6,000
U Charged off account due from ABC Company $5,000
V Sold equipment for $9,000 which is $2,000
in excess of its book value, Accumulated Dep is $7,000 $10,000
W Declared a Dividend but did not pay it $30,000
X Sold 500 units @$125 per unit of which one-half was collected
at the point of sale while the rest on open account using FIFO $62,500
Y Incurred Freight cost on the above sale which is due in 30 days $5,000
Z 100 units of inventory was missing during recent audit calculate
40
ACE
DEL
IVER
Y SE
RVI
CE
ASSE
TS
Acco
unts
(Allo
wan
ce)
Land
&M
achi
nery
&Ac
cum
ul.
Equi
pmen
tO
ffice
Prep
aid
Cas
hR
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vabl
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Inve
ntor
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uild
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Equi
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tD
epre
ciat
ioSu
pplie
sSu
pplie
sEx
pens
es
A B C D E F G H I J K L M N O P Q R S T U V W x Y Z
41
ACE
DEL
IVER
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RVI
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LIAB
ILIT
IES,
CAP
ITAL
& IN
CO
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STAT
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T
Acco
unts
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urre
nt P
ort
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erm
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ost o
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ble
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of L
ong
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Paya
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Deb
tC
apita
lG
ains
Goo
ds S
old
Expe
nses
A B C D E F G H I J K L M N O P Q R S T U V W x
42
Reconcilement of Retained Earnings and Net Worth
Retained Earnings
Determining whether a company has declared a dividend payment or withdrew cash out of the
company other than in the form of salaries, bonuses or loans can be determined by reconciling
the change in Retained Earnings. The formula to do this is as follows:
Beginning Retained Earnings
Plus: Profits earned in the current period
Or
Minus: Losses incurred in the current period
Expected Ending Retained Earnings
Actual Ending Retained Earnings
Rule: If the Actual Ending Retained Earnings is less than Expected: A Dividend was declared
Please review the following information and determine if any dividends were declared
Net Earnings
Stockholders' equity 2013 2014 2015
Capital stock, issued and outstanding
150,000 shares 37,500 37,500 37,500
Paid-in capital 22,500 22,500 22,500
Retained earnings 3,079 46,121 10,5798
Total stockholders' equity 63,079 106,121 165,798
Dividends Declared
2015 2014 2015
19,863 43,042 59,677
43
Net Worth
Beginning Net Worth
Plus: Profits earned in the current period
Or
Minus: Losses incurred in the current period
Expected Ending Net Worth
Actual Ending Net Worth
Rule: If the Actual Ending Net Worth does not match the Expected Ending Net Worth then is a
Capital change has occurred. This change should be investigated, identified and understood.
Please determine the amount of the Capital change using the information below:
2013 2014 2015
Net Income: 33,000 51,000 115,000
Common Stock 150 150 175
Preferred Stock 0 0 0
Paid in Capital 0 0 0
Retain Earnings 884 915 1,000
Total Equity 1,034 1,065 1,175
TOTAL LIAB AND EQUITY 1,582 1,726 2,516
Capital Change
44
To appeal to a broader investment market, a corporation may issue one or more classes of stock
with various preference rights. A common example of such a right is the preference to
dividends. Such a stock is generally called a preferred stock.
The dividend rights of preferred stock are usually stated in monetary terms or as a percent of par.
For example, $4 preferred stock has a right to an annual $4 per share dividend. If the par value
of the preferred stock were $50, the same right to dividends could be stated as 8% ($4 / $50)
preferred stock.
Some preferred stock may also be granted the right to receive regular dividends that have been
passed (not declared), before any common stock dividends are paid. Such stock is called
cumulative preferred stock and the dividends that have been passed are said to be in arrears.
Preferred stock is not a part of the capital structure of a company. When this type of security is
present, an analysis of the covenants involving the preferred shares should be studied. If
preferred dividends are in arrears, the preferred stock is participating, or if preferred stock has a
redemption or liquidating value higher than its carrying amount, retained earnings must be
allocated between the preferred and common stockholders in computing book value.
To illustrate, assume that the following situation exists:
Stockholders’ equity
Preferred stock, 5%
Preferred
$300,000
Common
Common stock $400,000
Excess of issue price over par of common stock $ 37,500
Retained earnings $162,582
Totals $300,000 $600,082
Shares outstanding 3,000 4,000
Book value per share $100 $150.02
In the computation above it is assumed that no preferred dividends are in arrears and that the
preferred is not participating. Now assume that the same facts exists excerpt that the 5%
preferred is cumulative, participating up to 8%, and that dividends for three years before the
current year are in arrears. The book value of each class of stock is then computed as follows,
assuming that no action has yet been taken concerning dividends for the current year:
45
Stockholders’ equity
Preferred stock, 5%
Preferred
$300,000
Common
Common stock $400,000
Excess of issue price over par of common stock
Retained earnings:
Dividends in arrears (3 years at 5% a year) $45,000
$37,500
Current year requirement at 5% $15,000 $20,000
Participating – additional 3% $9,000 $12,000
Remainder to common $61,582
Totals $369,000 $531,082
Shares outstanding 3,000 4,000
Book value per share $123 $132.77
In connection with the book value computation, the analyst must know how to handle the
following items: the number of authorized and unissued shares; the number of treasury shares on
hand; any commitments with respect to the issuance of unissued shares or the reissuance of
treasury shares; and the relative rights and privileges of the various types of stock unauthorized.
Although the book value per share figure is useful in some cases, in some instances it is not
meaningful for decision-making purposes – most especially when assets have greatly appreciated
in value.
46
ACCOUNTING METHOD: CASH BASIS VS. ACCRUAL BASIS
Financial Statements and Tax Returns can be prepared on Cash or an Accrual Basis. The
difference in the two accounting methods is vast. Both methods have their advantages and
disadvantages. Unfortunately, bankers often do not have a say in type of accounting method the
client will present unless while a problem loan situation in which the banker mandates the type
of accounting method.
Accrual Basis
Financial statements prepared on an Accrual Basis will recognize all economic events regardless
of the collection of cash at the point of sale or the payment of costs and expenses at the time the
costs and expenses are incurred. Simply stated, the Accrual Method records all economic
transactions that a normal entity will incur on a day-to-day basis. The advantage of the Accrual
Method is that the user will see all the accounting transactions in a given period thus providing
the opportunity to perform a thorough analysis on the entity. The disadvantage is that the Accrual
Method does not indicate the amount of cash generate or used by the entity.
Cash Basis
Financial statements prepared on the Cash Basis will recognize economic events only when cash
is collected from sales and paid out for costs and expenses. It is meant to present a more
conservative look at the performance on an entity by ignoring transactions that do not generate
cash or use cash. Companies that use this method do not want to “Count Their Chickens Before
They Hatch”, so to speak.
Since the Cash Basis only reflects cash transactions, there is no need to perform a Cash Flow
Analysis because the financial statements are on a Cash Basis already. The disadvantage is that
the user of the financial statements will not see all of the economic events an entity incurred and
as such, a thorough analysis of the entity cannot be performed.
Cash Basis of accounting is often used by law, accounting, engineering, architectural firms and
many other similar service related businesses because collections of amounts due from clients
may take longer than other entities that provide a vital product that is critical to the production of
goods and services.
Companies utilizing the Cash Basis will not show accrual accounts on their balance sheets such
as Accounts Receivable, Accounts Payable and Accrued Expenses and as such, the loan officer
should request for an ageing of those accounts so that a thorough analysis can be performed.
47
CA
SH
BA
SIS
OF
AC
CO
UN
TIN
G V
ER
SU
S A
CC
RU
AL
BA
SIS
OF
AC
CO
UN
TIN
G
Sta
tem
en
t of
Ca
sh B
asi
sA
ccru
al
Ba
sis
Ba
lan
ce S
heet
Ca
sh F
low
Sal
es6
00
,00
01
,00
0,0
00
Acc
ou
nts
Rec
eivab
le(4
00
,00
0)
60
0,0
00
Co
st o
f G
oo
d S
old
(40
0,0
00
)(7
00
,00
0)
Acc
ou
nts
Pay
able
30
0,0
00
40
0,0
00
Gro
ss P
rofi
t2
00
,00
03
00
,00
02
00
,00
0
Op
erat
ing
Ex
pen
ses
(10
0,0
00
)(2
00
,00
0)
Acc
rued
Ex
pen
ses
10
0,0
00
10
0,0
00
Op
erat
ing
In
com
e1
00
,00
01
00
,00
01
00
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es(2
0,0
00
)(3
4,0
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)In
com
e T
ax P
ayab
le1
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(20
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00
66
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80
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48
Louisiana Fresh Fish CompanyBalance Sheet
Years Ended December 31(000)
ASSETS 12/31/13 12/31/14 12/31/15
Cash 195 126 69
Accounts Receivable, Net 475 683 994
Inventory 241 300 743
Prepaid Expenses 19 23 29
Other Current Assets 0 37 38
Total Current Assets 930 1,169 1,873
Gross Fixed Assets 782 856 1,076
Less:Accumulated Depreciation (224) (323) (465)
Net Fixed Assets 558 533 611
Other Non-Current Assets 94 24 32
TOTAL ASSETS 1,582 1,726 2,516
LIABILITIES AND EQUITY
Notes Payable-Line of Credit 0 25 375
Long-Term Debt-Current Port. 26 23 15
Accounts Payable 138 231 465
Interest Payable 2 2 3
Income Tax Payable 0 2 0
Accured Expenses 70 86 181
Dividends Payable 0 0 30
Other Current Liabilities 10 12 7
Total Current Liabs. 246 381 1,076
Long-Term Debt 302 280 265
Common Stock 150 150 175
Preferred Stock 0 0 0
Paid in Capital 0 0 0
Retain Earnings 884 915 1,000
Total Equity 1,034 1,065 1,175
TOTAL LIAB AND EQUITY 1,582 1,726 2,516page 45
49
Louisiana Fresh Fish CompanyIncome Statement
Years Ended December 31(000)
12/31/13 12/31/14 12/31/15
Net Sales 5,937 8,481 11,025
Cost of Goods Sold 4,472 6,402 8,240
Gross Profit 1,465 2,079 2,785
Operating ExpensesSalaries 1,015 1,446 1,859
Utilities 50 70 93
Insurance 21 28 36
Telephone 15 20 27
Other Taxes 5 6 9
Bad Debt Write-off 6 6 9
Advertising 88 132 171
Interest Expense 29 41 54
Delivery Expenses 99 147 195
Depreciation 84 111 154
Total Operating Expenses 1,412 2,007 2,607
Income Before Taxes 53 72 178
Gain (Loss) from Sale of Fixed Asset 0 7 (5)
Extraordinary Income 0 0 19
Income Taxes 20 28 77
Net Income 33 51 115
page 46
50
AB & C,P.C.
CERTIFIED PUBLIC ACCOUNTANTS
Independent Auditor's Report
To the Stockholders and Board of Directors Bulldog-Tech Manufacturing ("The Company")
We have audited the accompanying balance sheets of The Company (an S
Corporation) as of December 31, 2015 and 2014, and the related statements of
operations and retained earnings and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on our
audit.
We conducted our audit in accordance with general accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis. evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of The Company as of December 31, 2015 and 2014,
and the results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles.
Our audit was conducted for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying Supplementary Schedules I-III are
presented for purposes of additional analysis and are not a required part of the basic
financial statements. Such information has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion, is fairly
presented in all material respects in relation to the basic financial statements taken as
a whole.
AB & C, P.C.
January 10,2015
Bankers Insight Group, LLC
51
Bulldog-Tech Manufacturing, Inc.
Balance Sheet
As of December 31
ASSETS
2013 % 2014 % 2015 % CURRENT ASSETS:
Cash $ 3,291 $ 107,036 $ 52,039
Accounts Receivable, Net 1,291,080 1,009,314 1,280,430 Inventory 2,465,806 2,279,892 2,205,935
Prepaid Expenses 21,613 16,224 17,076
Notes Receivable - Current Portion 19,188 11,227 12,464
Total Current Assets 3,800,978 3,423,693 3,567,944
PROPERTY, PLANT AND EQUIPMENT
Land 37,765 37,765 37,765
Buildings 483,743 492,831 498,436
Machinery & Equipment 1,108,534 1,117,421 1,216,916 Autos & Trucks 52,505 52,505 54,569
Office Furniture & Fixtures 272,410 429,017 490,330
Patterns & Molds 66,158 105,957 140,668
Patents 405,064 339,057 355,386
2,426,179 2,574,553 2,794,070
Less Accumulated Depreciation p,631,044} (1,680,054) (1,852,934}
Net Property, Plant & Equipment 795,135 894,499 941,136
OTHER ASSETS:
Investment - ABA Partnership 71,883 71,818 -0-
fnvestment - Rabbi Trust -0- -0- 21,456 Notes Receivable - Shareholders, Net 125,440 106,530 94,066
Cash Value - Officers' Life Insurance 18,207 19,124 19,592
Deposits 15,313 37,049 57,974 Patents Pending 25,899 19,723 21,287
Total Other Assets 256,742 254,244 214,375
TOTAL ASSETS $4,852,855 $ 4,572,436 $ 4,723,455
The accompanying report and notes to financial statements are integral parts of these statements.
52
Bulldog-Tech Manufacturing, Inc.
Balance Sheet
As of December 31,
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
2013 % 2014 % 2015 %
Accounts Payable $1,008,775 $ 476,569 $ 506,961 Notes Payable - Bank 455,759 500,000 150,000
Notes Payable - Current Portion 100,623 132,643 134,140
Accrued Commissions 59,196 55,287 43,077
Accrued Salaries & Bonuses 211,030 173,357 305,956
Accrued Other Liabilities 87,264 79,706 75,442
Total Current Liabilities 1,922,647 1,417,562 1,215,576
LONG-TERM UABILITIES:
Notes Payable 350,391 372,674 313,379
Mortgages Payable 598,361 587,951 576,479 Deferred Compensation 0 140,668 309,267
Less: Current Portion of Long Term Debt {100,623} {132,643} {134,140}
Total Long-Term Liabilites 848,129 968,650 1,064,985
Total Liabilities 2,770,776 2,386,212 2,280,561
STOCKHOLDERS' EQUITY:
Common Stock, No Par, 50,000 Shares
Authorized, 22,205 Shares Issued
and Outstanding 25,000 25,000 25,000
Paid-In Capital 11.766 11,766 11,766
Retained Earnings 2,045,313 2,149,458 2,406,128
Total Stockholders' Equity 2,082,079 2,186,224 2,442,894
TOTAL LIABILITIES AND EQUITY $ 4,852,855 $ 4,572.436 $ 4,723,455
The accompanying report and notes to financial statements are intergral parts of these
statements.
53
Bulldog-Tech Manufacturing, Inc.Statement of Operations and Retained Earnings
For the Years Ended December 31,
Amount Percent of Sales
2013 2014 2015 2014 2015
Sales $ 9,037,606 $ 8,256,972 $ 9,544,948 100.00% 100.00%
Cost of Goods Sold 6,977,156 6,123,634 6,806,593 74.16 71.31
Gross Profit on Sales 2,060,450 2,133,338 2,738,355 25.84 28.69
Operating Expenses:
Selling Expenses 695,555 778,642 819,194 9.43 8.58
Administrative 669,735 801,974 8.11 840
Expenses 502,015
Total Operating
Expenses 1,197,570 1,448,377 1,621,168 17.54 16.98
Income From
Operations 862,880 684,961 1,117,187 8.30 11.71
Other Income and
(Expense) (101,498) (131,056) (96,485) (1.59) (1.01)
Income Before Bonuses
Deferred
Compensation
and Profit Sharing 761,382 553,905 i ,020.702 6.71 10.70
Bonuses 280,116 175,656 324,305 2.13 3.40
Deferred Compensation 140,668 168,599 1.70 1.77
Profit Sharing
Contribution 25,980 22,400 28,051 .27 0.29
lncome Before
Discontinued Operations 455,286 215181 499747
Loss From Discontinued
Operations at Subsidiary (283,431) 0 0
NET INCOME 171,855
Beginning Balance
215,181 499,747 2.61% 5.24%
Retained
Earnings 1,873,458 2,045,313 2,149,458
Less Distributions to
Shareholders -0- p11,0362 243.077)
Ending Balance
Retained
Earnings $2,045,313 $ 2,149,458 $ 2,406.128
54
BulldogTech Manufacturing, Inc.Statement of Cash Flows
For the Years Ended December 31,
2014 2015 Cash Flows From Operating Activities:
Net Income $ 215,181 $ 499,747
Adjustments to Reconcile Net Income to Net
Cash Provided by Operating Activities:
Depreciation and Amortization 175,830 234, 182
Gain on Sale of Assets (3,746) (15,702)
Increase/Decrease in Accounts Receivable 281,766 (271,116)
Decrease in Inventory 185,915 73,957
Increase/Decrease in Prepaid Expenses 5,389 (852)
Increase/Decrease in Accounts Payable (532,206) 30,392
Increase/Decrease in Accrued Liabilities (49,140) 116,125 Increase in Deferred Compensation 140,668 168,599
Net Cash Provided by Operating Activities 419,657 835,332
Cash Flow From Investing Activities:
Purchase of Equipment (288,238) (298,012)
Proceeds from Sale of Assets 16,790 23,207
Collections from Notes and Investments 26,871 83,045
Increase in Investment - Rabbi Trust -0 {21,456)
Increase in Other Assets (16,412} (22,957)
Net Cash Used By Investing Activities {260,989) {236, 173[
Cash Flows From Financing Activities:
Borrowing under Line of Credit 400,000 225,000
Payments on Line of Credit (355,760) (575,000)
Proceeds from Notes Payable 120,000 71, 820
Payments on Notes Payable (108,127) (132,899)
Distributions to Shareholders (111,036) (243,077)
Net Cash Used By Financing Activities (54,923 (654,156)
Net Decrease/Increase in Cash 103,745 (54,997)
Cash at Beginning of Year 3,291 107,036
Cash at End of Year $ 107,036 $ 52,039
The accompanying report and notes to financial statements are integral parts
of these statements.
55
SUPPLEMENTARY SCHEDULE I
Schedule of Cost of Goods Sold
For the Years Ended December 31,
Amount Percent of Sales
2015 2014 2015 2014
Beginning Inventory $ 2,279,892 $ 2,465,806
Purchases 4,171,767 3,520,337 Freight 104,905 71,432
Less Ending Inventory (2,205,935) (2,279,892}
Cost of Material So!d 4,350,629 3,777,683 45.58 45.75
Direct Labor 708,436 580,052 7.42 7.03
Factory Burden Consumed 1,747,528 1,765,899 18.31 21.38
COST OF GOODS SOLD $ 6,806,593 $ 6,123,634 71.31 74.16
Schedule of Factory Burden Auto and Travel Expense $ 5,008 $ 4,395 .05 .0
Depreciation 138,263 113,242 1.45 1.3
Employee Benefits 26,295 19,174 .28 .2
Engineering Expenses 39.421 41,336 .41 .5
Indirect Labor-
Supervision 91,601 88,671 2.01 2.2
Labor-Engineering & Research 123,538 114,915 1.29 1.3
Indirect Labor-Other 407,316 327,036 4.27 3.9
Insurance 110,280 157,544 1.16 1.9
Insurance-Employee Health 102,633 126,138 1.08 1.5
Insurance-Employee Life 9,349 12,481 .10 . 1
Miscellaneous 51,028 50,823 .53 .6 Patent Expense 39,426 51,277 .41 .6
Repairs and Maintenance 56,232 69,367 .59 .8
Rent 90,100 88,480 .94 1 0
Research and Development 14,886 37,841 .16 .4
Shipping Supplies 33,756 20,005 .35 .2
Sh0p Supplies and Tools 71,966 65,833 .75 .8
Taxes-Payroll 104,275 98,484 1.09 1.1
Taxes-Other 46,071 53,867 .48 .6
Utilities 68,340 61,811 .72 .7
Warranty Expense 17,744 63,179 .19 .7
TOTAL FACTORY BURDEN $ 1,747,52 $ 1,765,899 18.31 21.3
See accountant's report.
56
SUPPLEMENTARY SCHEDULE II
Schedule of Selling ExpensesFor the Years Ended December 31,
Amount Percent of Sales
2015 2014 2015 2014
Advertising $ 164,749 $ 157,624 1.73% 1.92%
Customer Relations 19,389 19,442 .20 .24
Demonstrator Equipment 27,383 31,755 .29 .38
Depreciation 8,757 5,590 .09 .07
Dues and Subscriptions 535 578 .01 .01
Employee Benefits 1,421 3,441 .02 .04
Insurance 12,455 15,104 .13 .18
Insurance-Employee Health 8,470 11,362 .09 .14
Insurance-Employee Life 943 1,117 .01 .01
Sales Auto Expense 15,412 11,344 .16 .14
Sales Commissions 246,024 242,947 2.58 2.94
Salaries 167,756 176,239 1.76 2.13
Taxes 15,479 19,069 16 .23 Telephone 24,752 16,418 .26 .20
Travel 51,581 32,431 . 53 .39
Miscellaneous 54,088 34,181 .56 .41
TOTAL SELLING EXPENSE $ 819,194 $ 778,642 8.58& 9.43%
Schedule of Other Income and Expense
Interest Income
Miscellaneous Income
$ 12,190 $ 13,476 .13% .16%
(Expense) (27,207) (5,719) (.29) (.07)
Reorganization Expense -0- (18,944) (.00) ( 23)
Gain on Sale of Assets 15,702 3,746 .16 .05 Interest Expense (97,170} !123,615} (1.01) {1.50}
TOTAL OTHER INCOME AND
EXPENSE $ (96,485) $ (131,056) (1.01) % (1.59) %
See accountant's report.
57
SUPPLEMENTARY SCHEDULE Ill
Schedule of Administrative ExpensesFor the Years Ended December 31,
Amount Percent of Sales
2015 2014 2015 2014
Auto $ 7,322 $ 4,156 .08% .05%
Bad Debts 19,312 -0- .20 .00
Depreciation 49,375 21,852 .52 .26
Director's Fees 3,705 2,000 .04 .02
Dues and Subscriptions 3,380 3,585 .04 .04
Employee Benefits 12,403 6,814 .13 .08
Insurance 40,987 16,759 .43 .20
Insurance-Employee Health 17,004 22,657 .18 .27
Insurance-Employee Life 2,339 4,124 .02 .05
Miscellaneous 19.702 11,053 .20 .14
Office Repairs and
Maintenance 27.062 14,055 .28 .17
Office Supplies and
Expense 40,453 34,244 .42 .41
Postage 6,903 5,747 .07 .07
Professional Fees 34,630 52,519 .36 .63
Salaries-Office 215,431 195,306 2.26 2.38
Salaries-Officers 220,825 202,548 2.31 2.46
Taxes-Miscellaneous 1,585 1,696 .02 .02
Taxes-Payroll 30,327 28,783 .32 .35
Taxes-Property 1,851 2,172 .02 .03
Telephone 27,530 24,059 .29 .29
Travel 19,849 15,606 .21 .19
TOTAL ADMINISTRATI VE EXPENSES $ 801,975 $ 669,735 8.40% 8.11%
See accountant's report.
58
Notes to Financial Statements
For the Years Ended December 31, 2015 and 2014
Note l - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of The Company (the Company) is presented to assist in understanding the Company's financial statement K The financial statements and notes are representations of the Company's management who is responsible for their integrity and objectivity.
Business Activity
The Company was organized in 1967 for the purpose of manufacturing and marketing products
to the utility industry in the Unite<l States, Canada, and foreign markets. The Company manufactures its
products in Littleton, Colorado and markets them through a nationwide distributor and representative network.
u1ventories
Inventories are stated at the lower of average cost or market. inventories as of December 31. 2009 and 2008 are as follows:
2015 2014
Raw Materials $ 1,132,959 $ 1,033,360
Work in Process 349,072 329,13
Finished Goods
Demonstrators
683;038
40,866
899,059
18,34?
Total Inventory $ 2,205,935 $ 2,279,892
Prepaid Expenses
Prepaid expenses consist of prepaid insurance and loan fees and are amortized over the
contractual period.
Property, Plant & Equipment
Property, Plant and Equipment are stated at cost less accumulated depreciation and are depreciated over the estimated life of each asset. When assets are retired or otherwise disposed of: the
cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized. Expenditures for ID<lior renewals and battements that extend the useful lives of assets are capitalized, costs of maintenance and repairs are charged to income as incurred. Depreciation has been provided utilizing both straight-line and accelerated methods.
Depreciation expense for the years ended December 31, 2009 and 2008 is as follows:
2015 2014
Estimated
-U---s--e-fu-l L-ife -Buildings and Improvements $ 13,417 $ 13.516 20-40 Years
Autos and Trucks 8,286 914 5 Years
Machinery and Equipment 104,389 95,576 7-10 Years
Office Furniture and 60,066 33.091 5-10 Years
Fixtures
Patents 29,805 29,173 10-17 Years
Patterns and Molds 18,219 _ 3,560 7-10 Years
Total $ 234,182 $ 175,830
Fixed assets capitalized as acquired under capital leases consist of equipment with a cost of
$655,789 and accumulated depreciation of $392,363.
Bankers Insight Group, LLC
59
Notes to Financial Statements
For the Years Ended December 31, 2015 and 2014
Note 1 -SUM JvJ ARY OF SIGNIFICANT ACCOUNTING PLOICIES (Continued)
Miscellaneous
Research and development expenditures are expensed as incurred.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that affect
certain reported amounts and disclosures. Accordingly. actual results could differ from
those estimates.
Income Taxes
The Company elected to be taxed as an S corporation beginning in 1991. Under
these provisions, The Company does not pay taxes on its corporate income but passes
through that income to its shareholders who are liable for income taxes on their
proportionate share. The Company pays an annual franchise tax to the state of California.
Note 2 -ACCOUNTS RECEIVABLE
The Company follows the allowance method of providing for uncollectible
accounts receivable. The allowance for doubtful accounts was $5,400 and $8,682 at
December 31, 2015, and 2014, respectively. Charges to earnings for the years ended
December 31, 2015 and 2014 were $ t 9,312 and $-0-, respectively.
Note 3 -NOTES PAYABLE - SHORT TERM
The Company's short-term debt consists of the following;
Bank line of credit of
$1,000,000 collateratized by
accounts receivable, contract
rights. intangibles, inventory
and equipment of The Company,
accruing interest at the bank's
prime rate plus one-quarter
Percent. The note is due in
October 2010. The note is
guaranteed by the principal
shareholder of The Company
2015 2014
$ 150,000 $ 500,000
Current portion of long-term debt 134,140 132,643
Total Short-Term Debt $ 284,140 $ 632,643
Bankers Insight Group, LLC
60
Notes to Financial Statements
For the Years Ended December 31, 2015 and 2014
Note 4 - LONG TERM LIABILITIES
The Company's long-term debt consists of the following:
Capital leases on equipment purchased under
Non-cancelable !ease agreements, The economic
substance of the leases is that The Company
is financing the acquisition of those assets
through the leases. Payable in monthly
installments of $4,556 including principal
and interest at 8% with the final payment
due September, 2010. $ 136,460 $ Hs9,082
Note payable to a financial
institution collateralized by
a prestrike, payable in
monthly installments of $1,476, including interest at
8.58%. The final payment is
due February, 2011. 61,877 -0-
Note payable to a financial
institution collateralized by
accounts receivable, inventory
and c<Equipment of the Company,
payable in monthly principal installments of S3,229, plus
interest at the bank's prime
rate plus three-quarters
percent. The final payment is
due October 1, 20!0. 32,292 71,042
:'payable to a financial
institution collateralized by
computer equipment of The
Company payable in 60 monthly
principal installments of $2.483 plus interest at the
bank's prime rate plus three
quarter's percent. The final
payments due March l, 201l. 82,750 112,550
Mortgage payable
collateralized hy The
Company's main building at
2.500 S. Tejon St., Littleton,
CO. The mortgage is payable in
monthly installments of 5%, 69 l
payable for 20 years with the
remaining unpaid balance due
on October 4, 2013. The
mortgage accrues interest at the rate of 9.75% per annum. 576,479 587,951
Bankers Insight Group, LLC
61
Notes to Financial Statements
For the Years Ended December 31, 2015 and 20
Note 4 -LONG TERM LIABILITIES
(Continued)
Amount accrued under a
defected compensation
agreement payable to managing
officers of The Company under
terms of the agreement (see note &)_
309,267 140,668
Subtotal 1,199,125 1,101,293
Less current portion of long
term debt _u34 , 14_0) _( 1_32--'-,6_4_3-'-
Total Long-Term Debt $ 1,064,985 $ 968,650
The following is a schedule of maturities of long-tern debt:
2014 134.140 2015 107,856
2016 93,706
2017 33,596
2018 21 ,562
Thereafter 808,265
$1.199,125
The following is a schedule of minimum lease payments required under the capital leases:
2014 54,675
2015 54,675
2016 41,006
2017 -0-
$ 150.356
Note 5 -EMPLOYEES RETIREMENT PLAN AND TRUST
The Company has adopted an employee's profit sharing retirement plan which
includes employee contributions through a 401K plan with The Company matching one
half of employee contributions up to a maximum of 2% of eligible annual salaries. All
employees of The Company are eligible to participate after reaching age 21 and one year of
employment. In addition, the plan allows the Board of Directors, at its discretion, to make
additional contributions to the plan. The Company's profit sharing contribution for the
years ended December 31, 2015, and 2014 was $28,051 and $22,400, respectively.
Bankers Insight Group, LLC
62
Note 6 -CORPORATTON INCOME TAXES
The Company elected to become an S-corporation beginning in 2000. Therefore, no
income taxes are recorded by The Company as the shareholders are liable for income taxes
on the corporation's income allocated to them.
Notes to Financial Statements
For the Years Ended December 31, 2015 and 2014
Note 7 -RELATED PARTY TRANSACTTONS
The Company had the following related party transactions:
Ine Company sold a building to a partnership of its principal shareholders in 2000.
The partnership assumed the existing mortgage and executed a promissory note to The
Company for $173,968 which is payable over a 15 year period with monthly payments of
$1,922, including principal and interest at 10.5%. The Company remains contingently
liable for the mortgage. The balance on the note was $106,530 and $117,757 as of
December 31, 2009, and 2008, respectively. The Company also entered into a lease
agreement for this facility for a period of five years with monthly rental payments of
$5,833. The Company is responsible for taxes, insurance and maintenance of the property.
The lease expires in April, 2011 .
Note 8 -DEFERRED COMPENSATION
The Company entered into a deferred compensation agreement during 2007 with
two executive management officers to provide for compensation for future retirement. The
agreement requires the company to accrue deferred benefits equal to 12% of operating
income as defined in the agreement_ The accrued benefit each year is limited to no more
than 50% of the net income after a provision for taxes. The Company accrued $168,599
and $140,668 under the terms of the agreement for the years ended December 31, 2015 and
2014, respectively. The plan requires funding through a Rabbi Trust of 15% per year of the
accrued benefits until fully funded. The benefits normally vest at the rate of l 0% per year
with varying provisions as specified under the agreement. The benefits are payable on sale
of1l1e Company or the employee's termination, death or retirement.
Note 9 -OPERATf NG LEASES
The Company leases two plant facilities in Colorado for its operations. I ,ease obligations are as follows:
Raritan Property - Monthly rental is $5,833 with the lease expiring in April, 2016
(See Note 7). The lease has a renewal option at similar terms every two years.
Warehouse Property Monthly rental is $] 675 with the lease expiring in
December, 2016.
Bankers Insight Group, LLC
63
The Company is obligated under several operating leases for office and telephone
equipment,
The following is a schedule of minimum lease payments required under these
operating leases: 2014 96,820 2015 23,333
Notes to Financial Statements
For the Years Ended December 31, 2015 and 2014
Note 10 -CASH FLOW INFORMATION
The Company considers all short term investments with an original maturity of
three months or Jess to be a cash equivalent.
Cash paid for interest and income taxes for the years ended December 31, 2009, and
2008, consists of the following:
2015 2014
Interest $ 96,392 $ 123,645
Income Taxes
Bankers Insight Group, LLC
$ 800 $ 800
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66
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