PRINT SHOP

A business case presented to the Accountancy Department

In partial fulfillment of the course requirements in ACTBAS1

De Guzman, Carlo Y. Quinio, Gino B. Santiago, Anthony Harvey A. C40 August 25, 2010

I.

Introduction This business case is something that could is probably being repeated everyday all over the country. This business case shows just how important it is for both parties to be knowledgeable about basic accounting principles. The case presented a woman named Kim Morris who purchased a print shop from a man named Chris Stanley, both of whom were not knowledgeable about accounting principles. They made an agreement that Morris would pay Stanley 40% of the business annual net income in the next 3 years after the down payment was made. When these payments were made, Stanley was disappointed with his share because the business reported a low net income, which was due to the lack of familiarity with accounting and possibly the lack of professionalism. Accounting principles are very important to know. One cannot communicate his or her message well without proper knowledge of a language s fundamentals. As accounting is the language of business, its fundamentals must be learned and mastered as well if one wishes to use it to its fullest effect in running a business, gaining profit, and serving others. In this paper are our answers to the questions this business case presents, as well as our analysis and interpretation of the events in the case. Also in this paper are our opinions and suggestions about matters of accounting and business which were made using our current knowledge on accounting and its basic principles. We now present this paper to the accountancy department in partial fulfillment of the requirements of ACTBAS1.

II.

Discussion 1. Discuss the generally accepted accounting principles being violated by Kim. 1.1 The case stated that Morris recognized revenue as cash when received from customers while some of her clients were allowed a 30-day credit term. In immediately recognizing cash as revenue, regardless of the accounting period in which it is earned, Morris violates the principle of Income Recognition, which is also under the principle of Accrual. In accordance with these principles, revenue should only be recognized in the accounting period in which it is earned, regardless of when cash was received. 1.2 Morris included her family s personal expenses in supplies expense which should not be included in the aforementioned account as it is not part of the business operations. This is a violation to the principle of Accounting Entity wherein the business is considered as a separate entity from its owner. 1.3 Morris recorded 30,000 to salaries expense to her husband and each of her two teenage children totaling 90,000 in salaries excluding her own. In our opinion, she should have only paid them whenever they helped out and recorded that payment under miscellaneous expenses because they were not regular employees. This is a violation to the accounting principle of Reliability since we cannot determine if she really was biased to her family members. 1.4 Morris recorded depreciation for land, which usually increases in value rather than depreciating. Also, we feel that she understated the useful life of the business printing equipment and that this asset would far exceed the useful

life she stated in the case. She also should not have included her car in the depreciation expense because it is not stated that she transferred its ownership to the business. In recording her personal car, she once again violates the principal of Accounting Entity.

2. Do you think that the net cash flow generated by the business is higher or lower than the company s net income? Why? We think that the net cash flow generated by the business is higher than the recorded net income. This is due to the overstatement in expenses caused by the inclusion of the owner s personal expenses, the possibility of over paying her family, and understating the useful life of the business equipment, which would result in a higher depreciation expense per year. All these factors would lower net income. 3. What is your opinion about the agreement made by Chris and Kim? In the first place, Kim and Chris lacked the knowledge on accounting concepts and we think that they should not have done such an agreement until they understand the basic principles of accounting, or at least agreed upon with a consistent set of principles of their own to follow. Chris was disappointed on Kim s net income, and excluding other factors, one reason for the reported low net income was that Kim applied wrong accounting policies to compute for her business net income. They should have consulted with someone with knowledge on accounting principles or a certified public accountant for them to be guided on what is to be done and to help them to come up with a better agreement. 4. Identify at least two major business risks from operating Print Shop. 1.1 Usually, businesses like these normally do not last long. This is because even if it answers a need of the market, there is a lot of competition. Furthermore this is not really a kind of business people would be crazy about. 1.2 Poor management of the business is definitely a major risk. The case stated that Kim has no proper knowledge of accounting principles. This will probably lead to miscalculations and inappropriate business decisions, such as not investing enough back into the business simply because of ignorance in accounting, that will gravely affect the flow and consistency of the business. 5. In a business like Print Shop, what business strategies can you propose to increase the company s net income? One of the best strategies any business can implement is simply to do things extraordinarily well. Some examples would be to always keep the equipment up to date, or keep the old equipment well maintained, so that the printing process would be fast and efficient, neat and clean. Another would be to introduce variety. Do not stick to one kind of printing job, but rather, expound on other kinds of printing services such as tarpaulins, posters for billboards, print ads and the like. The more quality services offered, the bigger your market becomes. You have to be one step ahead of your competition, and as much as possible, offer high quality services at a cost people will be willing to pay for.