Guillermo_Furniture_Store_Financial_Analysis

Running Head: GUILLERMO FURNITURE STORE FINANCIAL ANALYSIS Guillermo Furniture Store Financial Analysis Anne Dodson, Christopher Pepe, Jon Marra, Michael Bradshaw, John Weatherston University of Phoenix 11/16/09 Week 4 Abstract In this paper Team A will pose as an analyst for Guillermo Furniture Store. We will be revising the store’s flex budget. We will be including risks associated with sales forecasts and an analysis of ethical considerations in the preparation and subsequent use of the budget. Lastly, in this paper we will consider how Guillermo Furniture Store’s code of ethics requires an ethics analysis of a performance tool. For any business, a well prepared budget can be used to project, track and compare expenditures and revenues. “The reason for the budget is to lay out... projected costs of doing business… and thereby lay the foundation for building your pricing structure for tomorrow and… generate the cash flow” (Schmitt, 2002). The budget is generally formulated by taking into account the previous performance of the business and can be assessed and changed depending on the current needs of the business. Guillermo Furniture has been operating on a flex budget to ensure that costs are controlled and that sales budgets are being met as the marketplace changes. With increased competition, Guillermo must understand which products are succeeding and identify areas for improvement. A flex budget accounts for changes in volume and the related consequences. “Unlike a static, traditional budget, a flex budget can be designed to quickly identify where such variations occur and create a better picture of current finances, as well as, a more realistic outlook” (Barr, 2005). Moreover, a flex budget is a collection of income and cost predictions at a variety of production or sales volumes. The cost payments for each expense are able to differ as sales or productions fluctuate. This analysis examines the risks associated with the sales forecasts and the ethical considerations taken into account upon the preparation and use of the budget. Risk Associated with Sales Forecasts An important component in the preparation of budgets is the sales forecast. According to Horngren, Sundem, Stratton, Burgstahler, Schatzburg (2008), “sales forecasts are predictions of future sales based on a predicted market.” (p. 296-303). Since the sales forecast is based on possible occurrences in the market, the manager must understand that unforeseen changes can affect the actual sales as compared to the sales forecasts and the firm’s budget. Managers must consider many factors when developing the sales forecast, as each creates some level of risk. Variables to consider include (Horngren, et al, 2008, p. 303): ▪ Past sales patterns ▪ Sales force estimates ▪ Economic conditions ▪ Competition activities ▪ Selling price change ▪ Product mix change ▪ Market analysis studies ▪ Advertising and sales promotions Guillermo Furniture’s historical sales trends suggest a continued expansion of mid-grade sales and a continued decrease in high-end sales over the last six months. Therefore, in the revised budget in the Appendix, the sales forecast has been changed based on an approximation of the trend to continue. This trend should not be ignored as market response is an important factor in developing a sales forecast. Analysis of Ethical Considerations When preparing and creating a budget, there are certain implications that apply to all employees with regard to following an ethical course of action. Everyone needs to be on the same page meaning that all of the employees in each department who are involved with using a budget need to understand that a company budget reflects the general cooperation and agreement of everyone and does not include any misappropriation of budget data. This misappropriation is a risk that creates unique incentives for departments and individuals who pad a budget to provide for additional resources that are not necessarily needed. Not only do these incentives cost a company more money and “lead managers to make poor decisions, they undercut attempts to maintain high ethical standards” (Horngren, Sundem, et. al., 2008, p.299). Maintaining a high standard of ethics not only produces a fair, unbiased budget but strengthens the communication between department managers and reinforces company objectives. Learning from recent scandals and many ethical risks associated with financial reporting, a precise analysis is essential for any performance tool and planned processes to ensure that it is inline with the code of ethics. Providing accurate financial information and the processes of how sales are targeted and generated can increase transparency to the public and improve perception that its operations are considered “ethical”. Ethical integrity is essential to ensure that he budget establishes realistic forecasts and accurate reporting of the scheduled activities so that the true picture of Guillermo’s financial health is depicted. Requirement of an Ethics Analysis for Any Performance Tool Because of recent scandals and many ethical risks that a company may face due to the way that finances are reported, a precise analysis is essential to display for any performance tool and planned processes. According to Horngren, Sundem, Stratton, Burgstahler, Schatzburg (2008), “a master budget is an analysis that explains ‘planned activities’ which include sales, expenses, balance sheets, and cash receipts and disbursements” (p. 304). Moreover, “a master budget consists of identified and desirable targets that will drive company processes and evaluations of performance on an ongoing basis” (Horngren, Sundem, Stratton, Burgstahler, Schatzburg, 2008 p. 309). Conclusion By analyzing the finances for Guillermo Furniture and by making predictions about the current market we will be able to utilize and understand the flex budget. By the means of the flex budget Guillermo Furniture Store can then address risks associated with sales forecasts and then implement an analysis of ethical considerations in the preparation and subsequent use of the budget. Lastly, Guillermo Furniture can enhance performance tools and planned processes by the employment of a current code of ethics. Furthermore, the use of performance tools and moral reliability helps devise accurate forecasts and increased scheduled activities that promote the overall growth of Guillermo Furniture. References Barr, P. (Sep. 2005). Flexing Your Budget. Modern Healthcare, Vol. 35 Issue 37. Retrieved November 15, 2009 from ProQuest. Horngren, C., Sundem, G., Stratton, W., Burgstahler, D., Schatzberg, J. (2008). Introduction to management accounting, Ch. 7 (14th ed.), New Jersey: Pearson-Prentice Hall, retrieved November 9, 2009, from University of Phoenix, Week 4 ACC/561. Schmitt, J. (Nov. 2002). You Can’t Be in Control Without a Budget. Contractor Magazine, Vol. 49 Issue 11. Retrieved November 14, 2009 from EBSCOHost. University of Phoenix. (2007). Supplement: Guillermo Furniture Budget, retrieved November 9, 2009, from University of Phoenix, Week 1, ACC/561. Appendix |Flex Budget | |  | | | | | | |  | |Budget Data | |  | | | | | | |  | |  |Units Budgeted | $ Budgeted |Units Actual | | | |  | |Production | | | | | | |  | | Mid-Grade | 2,840 | | 2,787 | | | |  | | High-End | 410 | | 421 | | | |  | |  | | | | | | |  | |Direct Materials ($)/Unit | | | | | | |  | | Mid-Grade | 140.00 | | | | | |  | | High-End | 250.00 | | | | | |  | |  | | | | | | |  | |Direct Labor ($/HR)/Unit | 15.00 | | | | | |  | |  | | | | | | |  | |Labor Time (Hrs)/Unit | | | | | | |  | | Mid-Grade | 21.50 | | 21.50 | | | |  | | High-End | 28.00 | | 28.00 | | | |  | |  | | | | | | |  | |Direct Cost/Unit | | | | | | |  | | Mid-Grade | 462.50 | | | | | |  | | High-End | 670.00 | | | | | |  | |  | | | | | | |  | |Price/Unit | | | | | | |  | | Mid-Grade | 529.00 | | | | | |  | | High-End | 839.00 | | | | | |  | |  | | | | | | |  | |Plant Overhead/Yr | | | | | | |  | | Salaries | | 50,000 | | | | |  | | Utilities | | 9,000 | | | | |  | | Benefits |10% | | | | | |  | | Insurance | | 3,000 | | | | |  | | Property Taxes | | 975 | | | | |  | | Depreciation | | 50,000 | | | | |  | | Supplies | | 6,000 | | | | |  | |  | | | | | | |  | |Income Tax Expense |42.00% | 6,179 | | | | |  | |  | | | | | | |  | |Variance Analysis - July | |  | | | | | | |  | |  |Units Budgeted | $ Budgeted |Units Actual | $ Budget Flex |$ Actual |Var-Flex |Var-Gross | |Revenue | | | | | | |  | | High-End | 410 | 343,990 | 421 | 353,219 | 335,558 | (17,661) | (8,432) | | Mid-Grade | 2,840 | 1,502,360 | 2,787 | 1,474,323 | 1,474,323 | - | (28,037) | |Total Revenue | | 1,846,350 | | 1,827,542 | 1,809,881 | (17,661) | (36,469) | |  | | | | | | |  | |Cost of Goods | | | | | | |  | | High-End | | 102,500 | 225.00 | 105,250 | 94,725 | 10,525 | 7,775 | | Mid-Grade | | 397,600 | 142.25 | 390,180 | 396,451 | (6,271) | 1,149 | |Total Cost of Goods | | 500,100 | | 495,430 | 491,176 | 4,254 | 8,924 | |  | |  | |  |  |  |  | |Net Revenue | | 1,346,250 | | 1,332,112 | 1,318,705 | (13,407) | (27,545) | |  | | | | | | |  | |Labor Wages | | 1,088,100 | 15.02 | 1,075,628 | 1,077,222 | (1,595) | 10,878 | |Office Salaries | | 50,000 | | 50,000 | 52,500 | (2,500) | (2,500) | |Benefits | | 113,810 | | 112,563 | 112,972 | (409) | 838 | |Supplies | | 6,000 | | 6,000 |5975 | 25 | 25 | |Utilities | | 9,000 | | 9,000 |9100 | (100) | (100) | |Insurance | | 3,000 | | 3,000 |3000 | - | - | |Property Taxes | | 975 | | 975 |975 | - | - | |Total Operating Expense | 1,270,885 | | 1,257,165 | 1,261,745 | (4,579) | 9,140 | |  | | | | | | |  | |Earnings before Taxes & Depr | 75,365 | | 74,947 | 56,961 | (17,986) | (18,404) | |Deprecition | | 50,000 | | 50,000 | 50,000 | - | - | |Earnings before Taxes | | 25,365 | | 24,947 | 6,961 | (17,986) | (18,404) | |  | | | | | | |  | |Income Taxes | | 10,653 | | 10,478 | 2,924 | 7,554 | 7,730 | |  | | | | | | |  | |Net Earnings | | 14,712 | | 14,469 | 4,037 | (10,432) | (10,674) | |  | | | | | | |  | |Sales Forecast | |  | | | | | | |  | |Budget=> | |January |February |March |April |May |June | |High-End | |467 |477 |487 |497 |507 | 517 | |Mid-Grade | |2458 |2483 |2508 |2533 |2559 | 2,585 | |  | | | | | | |  | |Actual=> | | | | | | |  | |High-End | |470 |456 |442 |429 |416 |421 | |Mid-Grade |  |2460 |2522 |2585 |2650 |2716 |2787 |