About this Assignment
This Accounting 202 course focuses on financial transactions for different business activities. Preparing financial information to help make business decisions is a key component of this practice. Company management will request different reports and analysis depending on the decisions they're making.
For this assignment, you will step into the role of a financial analyst for an expanding company. Based on the scenario described in the prompt, you will create a report that is 800-1200 words with a financial analysis and recommendation for management.
Scenario
In the five years since its founding, Online Advertising Responses, Inc. has grown rapidly. They currently have 20 employees and expect to hire another 20 in the new year to help manage a large new online state government advertising account. This type of expansion will require a significant investment in both expanded office space as well as general office equipment and technology equipment, including top-of-the line computers capable of handling advanced graphics software, printers, and other peripherals for each employee. They need a recommendation on what option would be the most cost-effective for them in terms of maintaining positive cash flow. In the past they have simply purchased whatever was needed outright.
A key consideration for their decision is that the company's only source of revenue is commissions from their clients. Each client has different spending patterns so cash flow varies by quarter. In the fiscal year that just ended, quarterly cash flow from client commissions followed the pattern noted below. They assume that in the coming fiscal year a similar pattern will occur.
| Quarter | Client Commissions |
|---|---|
| Q1 | $4,290,000 |
| Q2 | $5,375,000 |
| Q3 | $5,100,000 |
| Q4 | $3,500,000 |
| Total FY | $18,265,000 |
For the purposes of estimating cash flow for the next fiscal year, assume the following:
- The average salary for the 20 expected new employees will be $75,000.
- To accommodate the additional employees, assume an addition of another 3,000 square feet of rented office space at a cost of $175 per square foot.
- If they were to buy office furniture for each new employee, the estimated cost is $3,000 per employee.
- IT estimates that the appropriate technology package for hardware will be $8,000 per employee for an outright purchase.
Prompt
Management has asked their accountant to develop and prepare a recommendation on the best options:
- Buy outright and own all furnishings and technology. The furnishings will be fully financed for three years at 5%. The technology will be financed less a down payment on the technology for 6 years also at 5%. The finance manager is allowing us a $10,000 down payment. You will need to calculate the payments.
- Consider an operating lease for all of the new equipment and furnishings. The vendor will lease the full amount for a monthly payment of $5,000 for the first three years and $2,500 for the last three. The vendor will reclaim the merchandise at the end of 3 and 6 years respectively.
- Consider a capital lease for all of the new equipment and furnishings. The vendor will lease the full amount for 5% for 3 years (furnishings) and 6 years (equipment). You will need to calculate payments on the full amount.
Your job is to evaluate the three options and prepare a recommendation in 800-1200 words. You must support your recommendation with an analysis of the impact on operating cash flow from the different types of leases versus outright purchases using the cash flow statement and calculations. In your analysis, include calculations on the depreciation of both the technology items (with an expected life of 6 years) and the furnishings (with an expected life of 3 years). Your analysis should include the formula for straight line depreciation which you will use. The furnishings will have a residual value of $0 while the technology will have a value of $500 per employee set up.
The following provides a statement of cash flows for the fiscal year that just ended. The company's fiscal year aligns with a calendar year ending in December.
Statement of Cash Flows (Direct Method) for FY Ending 12/31
| Category | Amount |
|---|---|
| Client commissions | $18,265,000 |
| Employee salaries | $3,450,000 |
| Rent | $1,800,000 |
| Investing activities | Amount |
|---|---|
| Purchase of equipment | $140,000 |
| Purchase of furnishings | $60,000 |
| Financing activities | Amount |
|---|---|
| Additional owner's equity | $250,000 |
| Cash on hand as of 12/31 | $750,000 |
Average salary is $75,000.
Related Lessons
The following lessons from the course may help you with this assignment:
- Methods of Depreciation
- Reporting Depreciation on the Balance Sheet
- Impact of Capital Leases on Financial Statements
- The Statement of Cash Flows - Purpose, Format, Examples
Formatting & Sources
You may refer to the course material for supporting evidence, but you must cite the lessons using APA format, including both the title of the lesson and the instructor's name. If you're unsure about how to use APA format to cite your sources, please see the following lessons:
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Grading Rubric
Your essay will be graded based on the following rubric:
| Category | Unacceptable (0-2) | Needs Improvement (3-6) | Good (7-8) | Excellent (9-10) | Total Possible Points |
|---|---|---|---|---|---|
| Content (2x) | Projected cash flow is not included. No depreciation calculations are included. No overall recommendation including a narrative on expected tax implications is included. | Projected cash flow and depreciation calculations are included but contain significant errors. Narrative on recommendation which included commentary on tax implications is confusing/unclear. | Projected cash flow and depreciation calculations are included and are mostly correct. Recommendation, including commentary on tax implications is clear and well-supported. | Projected cash flow and depreciation calculations are accurate and clearly presented. Recommendation and discussion of possible tax implications is well-organized, fully supported and reflects professional language. | 20 |
| Presentation (2x) | The format is confusing, illogical, and/or doesn't meet required length. | The presentation meets length requirement, but is difficult to understand at times and/or lacks professional quality. | The presentation is appealing, clear, and easily understood. | Text is presented in a professional and creative manner that enhances delivery of the content. | 20 |
| Mechanics (1x) | Incorrect spelling, punctuation, capitalization, and use of standard English grammar hinders understanding. Word count is lower than 50% of the minimum word count for assignment. | Several instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar. Word count is 50-74% of the minimum word count for assignment. | Few instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar. Word count is 75-89% of the minimum word count for assignment. | No or very few instances of incorrect spelling, punctuation, capitalization, and usage of standard English grammar. Word count is 90% or more of the minimum word count for assignment. | 10 |
| Total | 50 |
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