CloudKicks

Financial Statements Version A

www.cloudkicks.weebly.com

Chase
Charlesworth
M

Kayla Nelson

Matthew Maughan

Table of Contents
I.

Company Overview ............................................................................................... 2

II.

Income Statement ................................................................................................. 3

III.

Balance Sheet......................................................................................................... 4

IV.

Statement of Cash Flows 2013 ............................................................................... 5

V.

Statement of Cash Flows 2014 ............................................................................... 6

VI.

Ratio Analysis ........................................................................................................ 7

VII. Business Analysis ................................................................................................ 24

VIII. Projected Income Statement ............................................................................... 30
IX.

Income Statement Explanation ........................................................................... 31

X.

Actual vs. Predicted EPS ..................................................................................... 33

XI.

Journal Entries ..................................................................................................... 34

XII. T-Accounts .......................................................................................................... 39

Company Overview
Our Company
CloudKicks is an online and location-based retailer specializing in a broad range of footwear products. We
are dedicated to customer service and providing our customers with a great buying experience. We work
directly with manufacturers and suppliers to ensure quality products and consistent supply.
Headquartered in Salt Lake City, Utah, CloudKicks has an efficient shipping infrastructure reaching out
across the country. We focus on quality service, and believe speed of delivery plays a large role. Our team is
highly trained in organization and productivity in order to meet our high quantity demands.
CloudKicks has been a leader in the online footwear marketplace since our inception in 2011. We continue
to improve upon our already high standards of customer satisfaction and rate of return customers. We
believe a lasting impression is made when someone is satisfied with their purchase, and strive to make this the
case for every pair of shoes sold.

Our Story
CloudKicks started operations in 2011 in a small warehouse in Salt Lake City, Utah. After earning profit
collected from the first two years of production, CloudKicks decided to expand. There are now two
warehouses and a handful of small retail stores located around the west side of the United States. Through
the expansion, CloudKicks has been using outside financing for construction in order to make large profits in
years to come.

From the Owners

We are excited to announce our expansion and hope to multiply the number of stores we have across the
country in the near future. The continued support from our creditors, shareholders, and customers are
greatly appreciated; we are happy to have so many interested in our company and products. Our expansion
process will take several years to complete, after which we expect our profits to soar. Thank you for your
interest in CloudKicks, your first and only stop for comfortable, affordable footwear.

CloudKicks Executive Officers

Matthew Maughan
Kayla Nelson
Chase Charlesworth

Income Statement

2014
4,186,925
(2,549,150)

2013
2,280,000
(850,000)

2012
2,500,000
(780,000)

Gross Profit

1,637,775

1,430,000

1,720,000

Operating Expenses
Wage Expense
Utility Expense
Insurance Expense
Rent Expense
Fuel Expense
Office Supplies Expense
Advertising Expense
Bad Debt Expense
Depreciation Expense
Amortization Expense
Interest Expense

1,057,000
51,000
168,250
61,717
13,900
19,800
42,442
247,875
678,700
3,708
103,773

565,000
37,050
23,905
18,009
2,900
6,000
23,000
60,750
500,000

785,000
37,500
21,097
17,080
1,400
5,000
25,000
45,000
500,000

56,250

56,250

Total Operating Expense

2,448,165

1,292,864

1,493,327

Income from Operations

(810,390)

137,136

226,673

90,892
8,000
1,293,892

23,676

34,900
(120,000)
21,574

23,676

(63,526)

483,502

160,812

163,147

Sales, Net
Cost of Goods Sold

Non-Operating or other
Gain on Sale of
Equipment
Loss on Sale
Interest Income
Unrealized Gain
Total Non-Operating
Net Income

1,195,000

Balance Sheet

Statement of Cash Flows 2013

Cash flow from operating activities
Net Income

160,812

Depreciation

500,000

Increase in Accounts Receivable (net)

(10,000)

Interest Receivable

(2,102)

Prepaid Insurance

9,109

Prepaid Rent

5,932

Office Supplies

1,880

Inventory

(200,000)

Accounts Payable

(120,000)

Wages Payable

2,000

Net cash provided by operating activities

347,631

Cash flow from investing activities

Marketable Securities

(60,000)

Net cash provided by investing activities

(60,000)

Cash flow from financing activities

Long-Term Notes Receivable

(285,000)

Paid Dividends

(135,000)

Net cash provided by financing activities

(420,000)

Net increase (decrease) in cash

(132,369)

Cash balance at January 1, 2013

658,079

Cash balance at December 31, 2013

525,710

Statement of Cash Flows 2014

Cash flows from operating activities:
Net Income
Depreciation
Amortization
Gain on sale of equipment
Unrealized Gain
Increase in Accounts Receivable (net)
Interest Receivable
Prepaid Advertising
Prepaid Insurance
Prepaid Rent
Office Supplies
Inventory
Accounts Payable
Wages Payable
Amortization of Bond Premium
Prepaid Revenue
Increase in Interest Payable
Net cash provided by operating activities

483,502
678,700
3,708
(1,195,000)
(8,000)
(1,071,587)
(67,216)
(3,858)
(206,750)
61,717
(6,200)
257,275
556,063
5,000
(2,144)
787,825
20,167
181,201

Cash flows from investing activities:

Purchased Truck
Purchase of Office Furniture
Marketable Securities
Purchase of Land
Purchased Patent
Sold Land
Short-Term Notes Payable
Sold Equipment
Net cash provided by investing activities

(230,000)
(102,000)
(47,000)
(970,000)
(89,000)
2,000,000
520,000
750,000

Cash flows from financing activities:

Issued Common Stock
Took out Long-Term Note
Paid Dividends
Contributed Capital
Issued Bonds
Bought Treasury Stock
Paid on Note Payable
Net cash provided by financing activities

950,000
135,000
(155,000)
29,000
1,022,995
(455,000)
(47,000)

Net increase in cash

Cash balance at January 1, 2014
Cash balance at December 31, 2014

1,832,000

1,479,995
3,493,196
525,710
4,018,906

Ratio Analysis
Earnings per Share
net income/average number of shares outstanding
Earnings per share is a ratio that communicates how much a company profits in relation to each
share of outstanding stock. In other words, it tells us how much per dollar of profit is produced by
each share of stock. It is an important number because it can determine stock prices and shareholder
interest.
2012: 163,147/4,000,000=.04078675
2013: 160,812/([4,000,000+4,000,000]/2)=.040203
2014: 483,502/([4,250,000+4,000,000]/2)=.11721261

Earnings Per Share

0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
2012

2013

2014

Each share of stock in 2014 has earned more than the two years prior combined. CloudKicks is
focusing on expanding, and therefore is relying more heavily on shareholders investments to
maintain high earnings.

Price-Earnings Ratio
market value per share/earnings per share
The price-earnings ratio is a measure of how much each share of stock is trading for in relation to
the earnings of the company allocated to each individual share. Investors see this as a multiple;
creditors are willing to lend the amount of the ratio for every $1 of earnings. It is useful for
comparing companies within the same industry to get an idea of which company is more likely to
experience future growth.
2012: 2.90/.04078675=71.1015219
2013: 3.80/.040203=94.5203094
2014: 5/.11721261=42.6575264

Price-Earnings Ratio
100
90
80
70
60
50
40
30
20
10
0
2012

2013

2014

Because CloudKicks has a higher-than-usual P/E, our investors expect higher earnings growth in
the future. This is great for us because it means they will keep investing into our company. Because
investors often use this statistic as a multiple, we can assume theyre willing to pay $42 for $1 of
current earnings.

Return on Equity
net income/average stockholders equity
Return on equity measures how much profit a company has produced with the money shareholders
have put into the business. It is used to compare companies within the same industry from a
profitability standpoint. This ratio shows us how much of our net income is derived from
shareholders.
2012: 163,147/5,040,980=.03236414
2013: 160,812/([5,046,792+5,040,980]/2)=.03188256
2014: 483,502/([5,067,894+5,046,792]/2)=.09560396

Return on Equity
12
10
8
6
4
2
0
2012

2013

2014

The amount of net income we contribute to stockholders equity has tripled since last year. This
means that the money weve received from stockholders have been invested into generating a larger
profit. As of this year, 9.56% of net income, or nine and a half cents to every dollar of income, is
from stockholders investments in our company.

Working Capital
current assets - current liabilities
This is an indicator of what a company would have left over if they had to suddenly pay off all
short-term liabilities. Investors may use this to see if a company is susceptible to bankruptcy and
financial problems, or if they are not investing enough of their assets. In short, it helps show the
liquidity of the business.
2012: 2,078,980-738,000=1,340,980
2013: 2,201,792-640,000=1,561,792
2014: 6,898,608-3,360,454=3,538,154

4,000,000.00
3,500,000.00
3,000,000.00
2,500,000.00
2012

2,000,000.00

2013
1,500,000.00

2014

1,000,000.00
500,000.00
-

Working Capital

Working capital shows that CloudKicks has enough current assets to pay back the current liabilities
if necessary, and still have plenty left over. In case of financial stress or bankruptcy, CloudKicks will
be able to pay off all liabilities owed within 12 months and have enough left over to pay off some of
the long-term debt accumulated.

10

Current Ratio
current assets/current liabilities
This ratio is another indicator of liquidity, or how easily a company could pay off short-term
liabilities. A high number means its easier for a company to access cash through selling inventory,
collecting their receivables, and withdrawing the funds in their cash account. Similar to the working
capital ratio, this shows whether or not a company has the right amount of liquid capital.
2012: 2,078,980/738,000=2.81704607
2013: 2,201,792/640,000=3.4403
2014: 6,898,608/3,360,454=2.05287976

4
3.5
3
2.5
2012

2013
1.5

2014

1
0.5
0

Current Ratio

CloudKicks has enough current assets to cover current liabilities on average 2-3 times. This is
important because in case of financial stress, we wouldnt be in debt for the first 12 months. Its
important to have enough assets to cover liabilities because too much debt is not a sign of a good
company. CloudKicks has never had a negative current ratio, meaning that we have always had the
capability to pay off our current debt with our current assets. The standard for a healthy ratio is 1.22.0, and CloudKicks has surpassed that. We can afford to invest excess assets into the company in
order to produce higher profits.

11

Quick Ratio
(current assets-inventory)/current liabilities
This ratio is also a measure of liquidity, with an emphasis on meeting short-term deadlines. The
inventory account balance is subtracted from current assets since it is product that has not been sold
and may not sell before the liabilities are due. Because of this, the quick ratio is more conservative
than the current ratio.
2012: (2,078,980-775,000)/738,000=1.76691057
2013: (2,201,792-975,000)/640,000=1.9168625
2014: (6,898,608-717,725)/3,360,454=1.83929999
1.95
1.9
1.85
2012

1.8

2013
2014

1.75
1.7
1.65

Quick Ratio

This ratio is a more in-depth look at CloudKicks ability to pay off our liabilities. This is a more
accurate representation because it takes out our inventory since its not always readily liquidated to
cash. Even with taking out inventory, we are right where we should be in the 1.2-2.0 range.

12

Cash Ratio
(current assets-inventory-receivables)/current liabilities
This ratio is a better communicator of liquidity because inventory and receivables are not considered
in this ratio; this way, investors can see exactly how easily a company could cover its current
liabilities without having to sell product or wait for customers to pay on their accounts (because
these transactions happen unexpectedly and are not definite to occur).
2012: (2,078,980-775,000-525,000)/738,000=1.05552846
2013: (2,201,792-975,000-455,000)/640,000=1.205925
2014: (6,898,608-717,725-1,725,963)/3,360,454=1.32568992
1.4
1.2
1
0.8

2012
2013

0.6

2014
0.4
0.2
0

Cash Ratio

This is an even better representation of our ability to pay off our current debt. If we collected none
of our receivables and didnt sell any of our inventories, we would still be able to pay off our current
liabilities and have some cash left over. We are also still consistently in the range we should be in.

13

Operating Cash Flow Ratio

cash flows from operating activities/current liabilities
This ratio communicates to investors how well a companys current liabilities are covered by the
cash flow from core business operations, such as product sales. Another way to look at this ratio is
in terms of dollars a company can pay a certain amount of every dollar of current liabilities it has.
The higher the number, the more like it is creditors will loan to a company. A lower number might
mean the company is growing and therefore has more debt than operating cash flow. The operating
cash flow ratio is another way to look at a companys liquidity.
2013: 347,631/640,000=.54317344
2014: 181,201/3,360,454=.05392158

Operating Cash Flow Ratio

0.1

0.2

0.3
2013

0.4

0.5

0.6

2014

This ratio measures how much of CloudKicks' current liabilities are covered by the cash flow from
operations, and is used to guesstimate short-term liquidity. Because we can't pay off our current
liabilities with our operating cash flows, there is a bigger need for capital. However, even though
our cash flow ratio is low, that is not a signal of a bad thing; we are just growing as a business and
therefore have more debt than capital at the moment.

14

Accounts Receivable Turnover

net sales/average accounts receivable
This ratio is a measure of efficiency. It lets investors know how many times a business receives the
cash from their accounts receivable in a given period. This is an important part of operating the
company because the cash from their customers goes towards expanding the company and paying
investors and creditors. Having a high accounts receivable turnover can increase the cash ratio and
make a company better suited to liquidate if necessary.
2012: 2,500,000/525,000=4.7619076
2013: 2,280,000/([455,000+525,000]/2)=4.65306122
2014: 4,186,925/([1,725,963+455,000]/2)=3.83951952

Accounts Receivable Turnover

2014

2013

2012

3
2014

2013

2012

Accounts receivable turnover measures how often CloudKicks collects the cash owed to them from
sales. Over the past three years, we have had a steady collection process and have become efficient
in collecting our cash. We collect our cash, on average, over four times a year or every 90 days.
This is a good rule of thumb to use, and in giving this option to our customers we can increase our
sales.

15

Inventory Turnover
cost of goods sold/average inventory
The inventory turnover ratio communicates how often inventory is sold in a company in a given
time period (usually a year). This is an important ratio because it tells creditors how quickly a
company can liquidate their inventory to pay off debt if needed. Inventory turnover can be
described in a number of times a year, or number of days (divide 365 days by the number of times a
year inventory is turned over).
2012: 780,000/775,000=1.00645161
2013: 850,000/([975,000+775,000]/2)=.97142857
2014: 2,549,150/([717,725+975,000]/2)=3.01188911

Inventory Turnover

2014

2013

2012

0.5

1.5
2014

2
2013

2.5

3.5

2012

Inventory turnover measures how often CloudKicks sells its inventory throughout the year and
shows how efficient we are at controlling our product. We can effectively sell the inventory we
produce and at a rate high enough to keep the need for production high. This ratio also shows how
liquid CloudKicks is. If the inventory can be sold quickly, that means it's more liquid than if we
couldn't sell the inventory. 2012 and 2013 had close inventory turnover rates, but this year we
tripled our turnover; this means our inventory is liquid enough to keep creditors interested, and that
we have a high demand for our product.

16

Asset Turnover Ratio

net sales/average total assets
This ratio tells us the relationship between sales and assets - how much of our revenue is produced
per dollar of assets. The higher the number the better, simply because that means the company is
being efficient in using their assets in producing sales.
2012: 2,500,000/7,028,980=.35567038
2013: 2,280,000/([6,936,792+7,028,980]/2)=.32651256
2014: 4,186,925/([10,787,200+6,936,792]/2)=.47245846

Asset Turnover Ratio

2014

2013

2012

0.05

0.1

0.15

0.2

0.25
2014

2013

0.3

0.35

0.4

0.45

0.5

2012

CloudKicks has seen a steady incline in the asset turnover ratio through the years, so it is safe to say
that our company is growing and generating more revenues per dollar of assets. Our uses of assets
are improving year by year, and we are becoming more efficient in utilizing them to produce sales
dollars.

17

Gross Profit Ratio

gross profit/net sales
This ratio compares profits to sales, and is important because it communicates the profitability of a
company. It shows how much per sales dollar is profit that can go to paying expenses besides costs
of goods sold. This ratio is used to show a companys financial health because if it is not high, a
company might be unable to pay its expenses and build for the future.
2012: 1,720,000/2,500,000=.688
2013: 1,430,000/2,280,000=.62719298
2014: 1,637,775/4,186,925=.39116416

Gross Profit Percentage

2014, 39.1

2012, 68.8

2013, 62.7

Over the past three years, we have seen a decline in our gross profit percentage; however, as stated
before, that is to be expected when growing the business and getting it ready for higher sales and
productivity. Because we had a high percentage the first two years of operation, we can afford to
expand the company and forego a high margin during the process of expansion.

18

Net Profit Margin Percentage

net income/net sales
The net profit margin percentage is an important ratio to gauge because it shows how much of sales
are reliant upon income. This ratio tells us how much net income we earn with each dollar of sales
we generate. It's basically taking the profit amount and putting it into a percentage.
2012: 163,147/2,500,000=.0652588
2013: 160,812/2,280,000=.0705316
2014: 483,502/4,186,925=.115479

Gross Margin Percent

14
12
10
8
6
4
2
0
2012

2013

2014

Our net profit margin has increased over the three years of analysis, which means that we are
making more profit per item sold. Our expenses are dropping in relation to each individual product
we produce. This shows we are being productive and efficient in our operations, and controlling
unnecessary expenses where we can.

19

Operating Margin
income from operations/net sales
Operating margin is a profitability ratio that describes how much of a companys sales are from
income from core business operations. Because management has more control over expenses
relating to operations, this ratio can changed drastically based on a managers decisions.
2013: 347,631/2,280,000=.15246974
2014: 181,201/4,186,925=.04327782

Operating Margin

0.02

0.04

0.06

0.08
2013

0.1

0.12

0.14

0.16

0.18

2014

Operating margin tells us how much of CloudKicks' revenue can be used to pay both investors and
taxes. Because we are growing our business, we expect this percentage to decrease short-term, but
increase as soon as expansion is completed.

20

Debt-to-Asset Ratio
total liabilities/total assets
This ratio communicates how much liabilities a company has in comparison to their assets; it shows
the percentage of assets being financed through liabilities, or debt. If a company has a ratio of over
1, it means they owe more than they are worth and cannot pay off their debt with what they
currently have. Essentially, the smaller the number the better, and the high the ratio, the more risk
there is financially.
2012: 1,988,000/7,028,980=.282829
2013: 1,890,000/6,936,792=.27246
2014: 5,719,306/10,787,200=.53019375

Debt-to Asset Ratio

0.6
0.5
0.4
0.3
0.2
0.1
0
2012

2013

2014

Debt-to-total assets shows us how much of CloudKicks' debt is due to assets. Because our debt
ratio is not close to 1, we should not have problems getting financing for new projects; because we
are in the middle of growing the company, we actually prove to have a low ratio in comparison to
other companies in the middle of growth.

21

Debt-to-Equity Ratio
total liabilities/stockholders equity
This ratio explains how much creditors have put into the company as compared to how much our
shareholders have put into it. It shows the proportion of equity and debt the company uses on its
assets.
2012: 1,988,000/5,040,980=.39436776
2013: 1,890,000/5,046,792=.37449532
2014: 5,719,306/5,067,894=1.12853702

Debt-to-Equity
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0
2012

2013

2014

This past year, CloudKicks has been aggressive in expanding and therefore we have had an increase
in outside financing from creditors. We need to cut back on taking out loans in order to pay some
of it down.

22

Book Value per Share

total equity/total outstanding shares
This ratio is used by shareholders to determine risk of each share if a company has paid off all of its
debts. It communicates how much a shareholder would receive per stock if a company needed to
liquidate (after all debts are paid off).
2012: 5,040,980/4,000,000=1.260245
2013: 5,046,792/4,000,000=1.261698
2014: 5,067,894/4,250,000=1.19244565

Book Value per Share

1.28
1.26

2013

2012

1.24
1.22
1.2

2014

1.18
1.16
1.14
2012

2013

2014

In the case of CloudKicks having to liquidate (having to sell all assets), we would be paying out
stockholders less than what we would have in past years (though its not a big decline). After our
expansion is finished and we are more aggressive towards paying off our long-term debt, we will
have a lot of freed up cash for our stockholders.

23

Business Analysis
Through the process of creating financial statements and recognizing the cash flows of CloudKicks,
we as executive leaders of the company have a better understanding of the financial health and
potential of the company. By analyzing the data we have described in this document, we are able to
explain the core of our business and predict future outcomes; this will also help us make effective
decisions regarding the well-being of CloudKicks. Our hope is to accurately set expectations for next
year to increase profits, maintain healthy assets, and promote our business to the appropriate
consumer base. First, we will analyze our business in past years in relation to this last year; then we
will analyze our projection for next year and describe the plan we have set in place to achieve our
company's goals.
If you were to glance over our income statement and balance sheet you might think that our
company is as healthy as can be; sales are up, net income is up, and we have more assets than last
year. But a closer analysis shows some very concerning things, especially when looking at the
operating portion of the business. One important thing to remember is that these financial
statements do not really relay any sort of information until they are analyzed and broken down.
Many of the numbers mean almost nothing because they are not cash numbers, nor are they being
compared to anything. This is especially true when looking at net income; net income is not a cash
number and really does nothing for us until we look at how we got to that number. As we look at
different accounts or situations, we will pay more attention to numbers that matter and that have
meaning behind them.
Accounts Receivable and Inventory
In order to grow the company, we made a decision to offer more credit to the vendors buying our
product; this was in the form of their credit risk as well as the amount of time we gave them to pay
us (45 days instead of the usual 30 days). This allowed us to expand very quickly by offering our
product to people who previously could not afford it or did not qualify due to their credit. There
was obvious risk in this decision,
which is why our bad debt expense
Accounts Receivable (% of
went up so much. This decision is also
Total Assets)
reflected in our Accounts Receivable
7.47%
Turnover ratio; we are only turning
2014
over our receivables 3.8 times per year
2013
16.00%
compared to 4.76 times per year 2
2012
6.56%
years ago. This has had an amazing
affect on our Inventory turnover-which only makes sense since we are
offering more credit. Our inventory
24

turnover has more than tripled this past year, which is getting closer to where we want it at around
3.5 - the industry average.
Our inability to collect receivables is worrisome even though we knew it would see a decline. Some
people see accounts receivable as an asset and therefore a good thing; however, we are a new
company and really need the cash; every dollar that sits in accounts receivable is a dollar we do not
know for sure that we will collect, especially with offering more credit this year. Our A/R is at 16%
of our total assets where last year it was only 6.56%. This is not a trend that we want to keep up so
in order to reduce our risk we have gone back to a stricter policy on the credit we will offer; that is
why projected sales for next year are down from what they were this year. This will allow us to lower
our receivables as we collect payments more efficiently.
Gross Profit and Operating Income
The item that is most concerning is the common size income statement. Numbers do not mean
anything in analyzing a business; that is why we have the common size statements - they show
everything as a percentage of sales
or total assets or liabilities. This is
Gross Profit (% of Sales)
80.00%
important because when looking at
70.00%
68.80%
the regular income statement, gross
60.00%
62.72%
profit looks good; in fact, it
50.00%
increased by more than $200,000
40.00%
39.12%
from last year. However, when
30.00%
looking at the common size income 20.00%
statement it shows a trend that does 10.00%
not look promising for the
0.00%
2014
2013
2012
company; the cost of goods sold is
going up and causing our gross
profit as a percent of sales to drop dramatically. Last year, 62.72 cents for every dollar we made went
to gross profit. This past year, that dropped to 39.12 cents for every dollar of revenue contributed to
our gross profit. What is almost more concerning is that our gross profit percentage has gone down
every year.

25

Income from operations vs. net cash provided by operating activities

Total operating expenses for the year were just about the same when expressed as a percentage, but
due to the dramatic decrease in gross profit, our income from operations was negative this year.
Now this is not always a bad sign; in order to understand it better you have to look some other
things. Not everything on the financial statements are cash numbers, and everyone knows the clich
- cash is king. When you look at the Statement of Cash Flows, it shows that we are positive in cash
flow for operating activities. That is good since we want our core business to be what is making us
money. However, when you look into what contributes to that positive number for operating
activities, it almost gets more confusing. $787,825 of that was prepaid revenue recorded in
November, so we have not even earned all of that yet. We made a large purchase on account late in
the year, which also boosted our operating cash since we did not pay for it with cash. If either one of
these transactions did not occur, the operating cash flow would be a very different story. So you can
see how it can be a bit complicated when we look into these things. Either way we look at it, the
income from operations this year
does not look good if it were to
Net Increase in Cash
stay like this in the coming years.
5.19%
Cash From
Operations

This is further explained by the

Statement of Cash Flows. It is easy
42.37%
Cash from
to see that the majority of cash we
Investments
52.44%
received as a business (94.8%) came
Cash from Financing
from investing or financing
activities. This is a bit odd since
most companies are in the business
of reinvesting into the business and buying new equipment in order to make money more efficiently;
this almost always causes the cash flow for investing activities to be a negative total cash flow. This
shows us that we are a bit unhealthy as a company pertaining to where we are getting our cash-since we only got 5.2% of it from our operating activities. We got a huge inflow of cash from selling
equipment and land, which would be great if we were in the business of selling equipment and land but we are not. Normally, we would be investing in more property, plant and equipment rather than
selling it.
Our Future
When all is said and done, this company can make it if we figure out the cost of goods. We have to
lower that in order to be sustainable in the long run. We are not creating enough cash with our
operating portion of the business. There is hope, however - much of the financing of the company
has been done with long-term debt or bonds that would be considered long-term, and this gives us
time to grow and cut costs where we need to. If we can find ways to cut down on our cost of goods
26

sold, whether it be through cheaper material or more efficient production, our gross profit will
increase and give us a larger net income.
By cutting back on our credit policy, we will receive our cash from customers sooner and can in turn
invest that money sooner into other assets in order to increase our liquidity and become more
financially sound. This will also help cut back our bad debt expense because it is more controllable
when we do not offer long-term credit to our customers; this will free up some of our cash and
increase our profitability.
Finally, if we choose our investments wisely we will have greater leverage in the market and be able
to sell those investments in the future for a larger amount than we had originally paid for
them. After we start seeing higher income by cutting back expenses and controlling our spending,
we will have the capability to invest rather than sell our property and equipment - this will also help
increase productivity and keep up with product demand.

27

Common Size Income Statement

2014
100.00%
-60.88%

2013
100.00%
-37.28%

2012
100.00%
-31.20%

Gross Profit

39.12%

62.72%

68.80%

Operating Expenses
Wage Expense
Utility Expense
Insurance Expense
Rent Expense
Fuel Expense
Office Supplies Exp.
Advertising Expense
Bad Debt Expense
Depreciation Expense
Amortization Expense
Interest Expense

25.25%
1.22%
4.02%
1.47%
0.33%
0.47%
1.01%
5.92%
16.21%
0.09%
2.48%

24.78%
1.63%
1.05%
0.79%
0.13%
0.26%
1.01%
2.66%
21.93%

31.40%
1.50%
0.84%
0.68%
0.06%
0.20%
1.00%
1.80%
20.00%

2.47%

2.25%

58.47%

56.70%

59.73%

-19.36%

6.01%

9.07%

Sales, Net
Cost of Goods Sold

Total Operating
Expense
Income from
Operations
Non-Operating or
other
Gain on Sale of
Equipment
Loss on Sale
Interest Income
Unrealized Gain
Total Non-Operating

2.17%
0.19%
30.90%

1.04%

1.40%
-4.80%
0.86%

1.04%

-2.54%

Net Income

11.55%

7.05%

6.53%

28.54%

28

Common Size Balance Sheet

December 31,
Assets
Cash
Marketable Securities
Accounts Receivable
Allowance for Bad Debt
Interest Receivable
Prepaid Advertising
Prepaid Insurance
Prepaid Rent
Office Supplies
Inventory

2014

2013

2012

7.58%
1.08%
6.56%
-0.36%
0.34%

9.36%
0.21%
7.47%
-1.49%
0.31%

Current Assets

37.26%
1.21%
16.00%
-2.08%
0.84%
0.04%
3.21%
0.74%
0.09%
6.65%
63.95%

2.02%
0.42%
0.05%
14.06%
31.74%

2.12%
0.50%
0.08%
11.03%
29.58%

72.08%
-28.83%
4.11%
20.90%

71.13%
-21.34%
0.00%
20.63%

Non-Current Assets

0.95%
-0.09%
43.57%
-24.05%
2.64%
12.24%
0.79%
36.05%

68.26%

70.42%

100%

100%

100%

9.33%
0.37%
4.82%
7.30%
9.14%
0.19%

6.49%
0.50%

8.11%
0.47%

2.23%

1.92%

31.15%

9.23%

10.50%

12.40%
9.27%
0.19%

18.02%

Total Liabilities

53.02%

27.25%

28.28%

14.42%
26.30%

14.23%
25.96%

Total Stockholders Equity

9.85%
25.14%
-4.22%
4.90%
11.30%
46.98%

7.21%
24.83%
72.75%

7.11%
24.42%
71.72%

100%

100.00%

100.00%

Office Furniture
Less: Accumulated Depreciation
Equipment
Less: Accumulated Depreciation
Long-Term Notes Receivable
Land
Patent
Total Assets
Liabilities
Accounts Payable
Wages Payable
Short-Term Notes Payable
Prepaid Revenue
Dividends Payable
Bond Interest Payable
Current Liabilities
Long-Term Notes Payable
Bonds Payable
Add: Premium
Stockholders Equity
Common Stock
Additional Paid-In Capital
Treasury Stock
Contributed Capital
Retained Earnings
Total Liabilities &SE

29

Projected Income Statement

30

Income Statement Explanation

During 2015, we plan on continuing our efforts to expand the company in order to increase our
long-term profits. For this explanation, we will start at the top of the income statement and work
our way through the statement items listed.
Sales, Net: We project our net sales to be $3,500,000 - we feel like we will sell more product than we
did in 2012 and 2013 because our consumer base has grown; however, because we are deeply
invested in making expansion of the company a top priority in order to increase future sales, we do
not predict to sell as much as we did in 2014.
Cost of Goods Sold: Through our ratio analysis, we find that the gross margin of each sale is going
down as well as the overall gross margin; this means our costs of goods sold is much higher than in
years past; however, because we do not project our sales to be as high as last year, we expect the
same from our cost of goods sold.
Gross Profit: The two total above will give us our gross profit at $1,295,000; not as high as in years
past, but still competitive while constructing other stores and warehouses.
Wage Expense: Our wage expense has varied, but for next year we project it to be 26.5% of net
sales; we get this number from the trends of this expense in past years.
Utility Expense: We expect our utility expense to be 1.3% of sales due to the fact that economies of
scale wont be as efficient since projected sales are lower.
Rent Expense: Because one year of the lease in $56,000, this is what we expect rent expense to be.
Fuel Expense: Our fuel expense will be closer to .42% of net sales because we are still trying to grow
the company and fuel is a major part of expansion.
Office Supplies: We project office supplies expense to be .5% of net sales; this went up as a
percentage of sales from past years, but isnt as high as a dollar amount due to the lower sales
forecast.
Advertising Expense: This expense has been very steady at around 1% of sales; for 2015, we plan on
keeping it about the same at 1.02%.
Bad Debt Expense: Sales jumped last year due to our allowing more credit, which is likely to raise
bad debt. Since we dont expect as much revenue next year, we are pulling back on the credit being

31

offered; however, we do have to account for the amount of receivables we have now - it will be 6%
of our net sales.
Depreciation Expense: Because we are depreciating the truck using the double-declining method, it
will go down from $92,000 to $55,200. The deprecation for the equipment before 2014 is calculated
to be the same since we dont have all the information necessary, and the furniture depreciation will
remain at $9,700; this adds up to $641,900 of total depreciation for 2015.
Amortization Expense: Our amortization expense will be $8,900 because we are using the straightline depreciation method on $89,000 for 10 years.
Interest Expense: Finally, we are still paying the $56,250 on the long-term note payable as well as
$6,521 for the note we took out in 2014; we have one more payment on the short-term note for
$6.500 and then the interest from the bond payable - our total interest expense will be calculated at
$100,883.
Total Operating Expense: Adding these expenses together, we are at a total operating expense of
$2,246,083.
Income from Operations: Subtracting that from gross profit, we are now at a loss of $951,083.
Gain/Loss on Sale: We do not plan on selling any equipment in 2015, so there will be no gain or
loss on sale.
Interest Income: Our interest income is forecasted to be $165,188 because we started out with more
cash so the average is almost double what it was to calculate interest receivable for 2014.
Unrealized Gain: We expect our unrealized gain to equal $5,500 because the market is projected to
pay 8% but the securities we have are doing much better than the market is. Because our company
just went public, we dont expect the value to jump as much as it did after we bought them.
Total Non-Operating Income: Our total for non-operating income, then, is $170,688.
Net Income/Loss: Adding operating income and non-operating income, we come to the conclusion
that we will be at a net loss of $780,395 for the year 2015.

32

Actual vs. Predicted EPS

Our company was predicted to earn $0.13 per share in 2014. We fell slightly short of that at just
under $0.12 (0.117) per share of earnings. While we didnt meet the analysts predictions, we still had
a dramatic increase from prior years. We issued more shares of stock for funding purposes, thus
lowering the amount of net income allocated to each share of stock outstanding. Our company later
repurchased some of that stock, but not as many shares as we issued earlier in the year. Cost of
goods sold also increased, which brought our ratio down slightly. We expect analysts will approve of
our earnings per share due to the change in outstanding stock and the fact that it still followed the
upward trend they had predicted. Investors should also be thrilled. The transaction from the
beginning of the year, which issued 250,000 shares of additional stock, generated the capital needed
for our new expansion project. In coming years investors will start to see the fruits of this expansion
as our business continues to grow.
Although we could have hit the predicted earnings per share number it was not in the companys
best interest. Things such as issuing less stock at the start of the year, or buying back more later on,
could have helped us meet analyst predictions. By failing to raise capital for expansion, or by using
too much cash to purchase treasury stock, we would have been stunting the companys possible
growth. Investors and executives
both want to see this company
Earnings Per Share
succeed in the long term, and
0.14
thats why we put more weight
0.12
into expansion than meeting a
0.1
predicted earnings per share
0.08
number.
0.06
0.04

We are pleased with this years

0.02
0
results, and as the graph shows,
2012
2013
2014
it is a dramatic improvement in
earnings per share from previous years. We recognize the attention that earnings per share gets in
the business world, but feel strongly that our company is moving in the right direction. The upward
trend has us moving in the right direction, and new expansion will continue to increase earnings.

33

Journal Entries
CloudKicks
Journal Entries
For the Year Ending December 31, 2014
Jo.
#

Date
Jan. 1

2
3
4
5

Jan. 1
Jan. 1
Jan. 1
Jan. 5
Jan. 22

7
8
9

Jan. 25
Feb. 1
Feb.
13
Mar. 1

10

11

12

Mar.
19
Mar.
20
Apr.
21

13

14

Apr.

Account
Cash
Common Stock 250k @ $.25
Additional Paid-In Capital
Equipment
Cash
Office Furniture
Cash
Cash
Notes Payable
Cash
Interest Receivable
Inventory, 8.5k @ $77
Cash
Accounts Payable
Accounts Payable
Cash
Prepaid Advertising
Cash
Cash
Accounts Receivable
Land
Cash
Short-Term Notes Payable

Debit
950,000.00

62,500.00
887,500.00
230,000.00
230,000.00
102,000.00
102,000.00
135,000.00
135,000.00
23,676.00
23,676.00
654,500.00
294,525.00
359,975.00
265,000.00
265,000.00
46,300.00
46,300.00
359,000.00
359,000.00
970,000.00
450,000.00
520,000.00

Office Supplies
Cash

26,000.00

Cash
Prepaid Revenue

43,000.00

Cash
Accounts Receivable
Revenue
Costs of Good Sold
Inventory
Inventory, 9250 @ $78.50

Credit

26,000.00

43,000.00
1,107,000.00
738,000.00
1,845,000.00
1,142,000.00
1,142,000.00
726,125.00
34

27
Cash
Accounts Payable
15
16
17

Apr.
29
May. 1
May. 6
Jun. 1

18

19

Jun.
30

20

Jun.
19

21

Jun.
26
Jul. 1

22

23

Aug. 1
Aug. 6

24
Aug.
15
25

26
27
28

Aug.
25
Sep. 3
Sep.
12

508,287.50
217,837.50

Accounts Payable
Cash
Dividends Payable
Cash
Cash
Contributed Capital
Prepaid Rent
Cash
Rent Expense
Prepaid Rent

576,000.00

Wages Expense
Wages Payable
Cash

509,000.00
35,000.00

Insurance Expense
Prepaid Insurance

137,000.00

Allowance for Bad Debt

Accounts Receivable
Cash
Bonds Payable
Premium on Bonds (sold at 3.6%)
Patent
Cash
Cash
Land
Gain on Sale

576,000.00
155,000.00
155,000.00
29,000.00
29,000.00
112,000.00
112,000.00
29,050.00
29,050.00

544,000.00

137,000.00
48,500.00
48,500.00
1,022,995.00
1,000,000.00
22,995.00
89,000.00
89,000.00
2,000,000.00
1,100,000.00
900,000.00

Cash
Accounts Receivable
Revenue 9,000 @ $127
Cost of Goods Sold
Inventory 9,000 @ $78.50

685,800.00
457,200.00

Cash
Accounts Receivable
Marketable Securities
Cash

159,000.00

Cash

750,000.00

1,143,000.00
706,500.00
706,500.00

159,000.00
47,000.00
47,000.00

35

29

Sep.
18

30
31
32
33
34
35

Oct. 1
Oct.
10
Nov. 1
Nov. 1
Nov.
17
Nov.
19

36

37
Dec. 1
38
Dec. 1
39

40

Dec.
31

41

Dec.
31

42

Dec.
31

43

Dec.
31

44

Dec.
31

Accumulated Depreciation
Equipment
Gain on Sale

75,000.00

Fuel Expense
Cash
***no journal entry required***
Inventory 11,250 @ $81
Accounts Payable

13,900.00

Accounts Payable
Cash
Treasury Stock 140,000 @ $3.25
Cash
Prepaid Insurance
Cash

530,000.00
295,000.00

13,900.00
911,250.00
911,250.00
92,000.00
92,000.00
455,000.00
455,000.00
375,000.00
375,000.00

Cash
Prepaid Revenue

776,000.00

Cash
Accounts Receivable
Revenue
Cost of Goods Sold
Inventory
***no journal entry required***
Wage Expense
Cash
Wages Payable
Long-Term Notes Payable
Interest Expense
Cash

525,478.50
642,262.50

Marketable Securities
Unrealized Hold Gain

776,000.00

1,167,750.00
700,650.00
700,650.00
548,000.00
508,000.00
40,000.00
47,000.00
10,000.00
57,000.00
8,000.00
8,000.00

Depreciation Expense
Accumulated Depreciation

577,000.00

Additional Paid-In Capital 4,110,000 @ $.24

Dividends Payable

986,400.00

577,000.00

986,400.00

Utility Expense
Cash

51,000.00

Interest Expense

56,250.00

51,000.00

36

Cash
45

Dec.
31

46

Dec.
31

47

48

Dec.
31
Dec.
31

56,250.00

Interest Receivable
Interest Income

90,892.32

Prepaid Revenue
Revenue

31,175.00

Supplies Expense
Office Supplies

19,800.00

Bad Debt Expense

Allowance for Bad Debt

90,892.32

31,175.00

19,800.00
247,875.13
247,875.13

37

Adjusting Entries
Jo.
#
2

Account
Depreciation Expense

Debit
92,000.00

Accumulated Depreciation
3

Depreciation Expense

92,000.00
9,700.00

Accumulated Depreciation
8

Advertising Expense

9,700.00
42,411.67

Prepaid Advertising
Interest Expense Jun. 1

42,441.67
6,500.00

Cash
Interest Expense Sep. 1
10

6,500.00
6,500.00

Cash
Interest Expense Dec. 1

6,500.00
6,500.00

Cash
Interest Payable

6,500.00
2,166.67

Interest Expense
18

Lease Expense 7 Months

2,166.67
32,666.67

Prepaid Lease

22

32,666.67

Interest Expense

15,856.42

Premium

2,143.58

Interest Payable
23

Amortization Expense

18,000.00
3,708.33

Patent
34

Building Insurance Expense

Prepaid Insurance

Credit

3,708.33
31,250.00
31,250.00
38

T-Accounts
Assets
Cash
525,710
950,000
135,000
23,676
359,000
43,000.00
1,107,000
1,022,995
29,000
2,000,000
685,800
159,000
750,000
776,000
525,488

9,091,668.50
4,018,906

230,000
102,000
294,525
265,000
46,300
450,000
26,000
508,288
576,000
112,000
544,000
155,000
89,000
47,000
13,900
92,000
375,000
508,000
57,000
455,000
51,000
56,250
19,500
5,072,763

Marketable Securities
75,000
47,000.00
8,000
130,000

Accounts Receivable
455,000
359,000
738,000
159,000
457,200
48,500
642,262.50
2,292,463
566,500.00
1,725,962.50

Allowance for Bad Debt

48,500
25,000
247,875.13
48,500.00
272,875.13
224,375.13

Prepaid Advertising
46,300.00
42,441.67
46,300.00
42,441.67
3,858.33

Prepaid Insurance
139836
137000
375,000
31,250
514,836
168,250
346,586

Prepaid Rent
29,050.00
29,050.00
29,050.00
29,050.00
-

Prepaid Lease
112,000.00
32,666.67
112,000.00
32,666.67
79,333.00

Interest Receivable
23,676
23,676
90,892.32
114,568
90,892

23,676.00

39

Office Supplies
3,520.00
19,800.00
26,000.00
29,520.00
19,800.00
9,720.00

Equipment
5,000,000.00
530,000.00
230,000.00
5,230,000.00
530,000.00
4,700,000.00

Inventory
975,000.00
1,142,000.00
654,500.00
706,500.00
726,125.00
700,650.00
911,250.00
3,266,875.00
2,549,150.00
717,725.00

Accum. Depr. - Equipment

75,000.00
2,000,000.00
577,000.00
92,000.00
75,000.00
2,669,000.00
2,594,000.00

Office Furniture
102,000.00
102,000.00

Accum. Depr. - Office Furniture

9700
9700

Land
1,450,000.00
1,100,000.00
970,000.00
2,420,000.00
1,100,000.00
1,320,000.00
Patent
89,000.00
89,000.00
85,291.67

3708.33
3708.33

Long-Term Notes Receivable

285,000.00
285,000.00

40

Liabilities

Accounts Payable
450,000.00
265,000.00
359,975.00
576,000.00
92,000.00
217,838.00
911,250.00
933,000.00
1,939,062.50
1,006,062.50

Wages Payable
35,000.00
35,000.00
40,000.00
35,000.00
75,000.00
40,000.00

Prepaid Revenue
31,175.00
43,000.00
776,000.00
31,175.00
819,000.00
787,825.00

Long-Term Notes Payable

47,000.00
1,250,000.00
135,000.00
47,000.00
1,385,000.00
1,338,000.00

Dividends Payable
155,000.00
155,000.00
986,400.00
155,000.00
1,141,400.00
986,400.00

Bonds Payable
1,000,000.00
1,000,000.00

Interest Payable
Short-Term Notes Payable
520,000.00
520,000.00

18000
2167
20167

Premium on Bonds
2,143.58
22,995.00
2,143.58
22,995.00
20,851.42

20167

41

Equity

Common Stock
1,000,000.00
62,500.00
1,062,500.00
1,062,500.00

Contributed Capital
500,000.00
29,000.00
529,000.00
529,000.00

Additional Paid-In Capital

1,824,406.00
887,500.00
2,711,906.00
2,711,906.00

Retained Earnings
986,400.00
1,722,386.00
483,502.00
986,400.00
2,205,888.00
1,219,488.00

Treasury Stock
455,000.00
455,000.00

42

Income Statement
Wage Expense
509,000.00
548,000.00
1,057,000.00
1,057,000.00

Lease Expense
32,666.67
32,666.67

Advertising Expense
42,441.67
42,441.67

Fuel Expense
13,900.00
13,900.00

Bad Debt Expense

247,875.13
247,875.13

Utility Expense
51,000.00
51,000.00

Insurance Expense
137,000.00
31,250.00
168,250.00

Gain on Sale
900,000.00
295,000.00
1,195,000.00
1,195,000.00

Depr. Expense - Equipment

577,000.00
92,000.00
669,000.00
669,000.00

Amortization Expense
3,708.33
3,708.33

Office Supplies Expense

19,800.00
19,800.00

Depr. Expense - Furniture

9,700.00
9,700.00

Interest Income
90,418.80
90,418.80

Unrealized Gain
8,000.00
8,000.00

Interest Expense
10,000.00
56,250.00
6,500.00
6,500.00
6,500.00
15,856.42
2,166.66
103,773.00
103,773.00

Cost of Goods Sold

1,142,000.00
706,500.00
700,650.00
2,549,150.00
2,549,150.00

Revenue
1,845,000.00
1,143,000.00
1,167,750.00
31,175.00
4,186,925.00
4,186,925.00

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