The Awesome Products Business ValuationCase
Awesome is a small closely held company operating in the UnitedStates. Assume you are in the early stages of preparing a businessvaluation on Awesome Products to assist a potential purchaser.
Included in the case is a copy of Awesome Products, Inc.Unadjusted Income Statement and Balance Sheet and Operating Expensedetail for the periods ending December 31st; all numbers are inthousands. All questions on this case use the attached data asbasis.
Instructions: Complete each of the exercises.
1. Based on the information given, prepare the normalizationentries for the years 2010 - 2014. Explain your reasons for eachnormalization entry.
2. Using the data you created in #1,
a. Prepare normalized and common size balance sheets for eachyear from 2010 - 2014
b. Prepare a normalized and common size income statement foreach year from 2010 - 2014.
Information needed for normalizationentries
You have discovered the following information after reviewingthe financial statements and other company documents, andinterviewing management.
1. Net Sales
During the period 2010 through 2014, the company has expandedtheir product line and opened new stores. This caused the increasein sales during this period. An analysis of the information showsthe following:
Year Number of NewStores Increase in Sales
20111 20%
2012 2
2013 0
2014 2 10%
2. Cost of Sales
Products purchased from the same supplier. Different cost ofsales percentages, due to different product lines.
3. Salaries and Wages
Generally, the increase in salary expense was caused by hiringadditional employees to work in the new stores. Included in theaccount, Officers' Compensation, is the salary of the owner, GeorgeBigshot. His salary for the 5 year period has been:
2010 | - $375,000 |
2011 | - $400,000 |
2012 | - $475,000 |
2013 | - $500,000 |
2014 | - $535,000 |
You have compared his salary to industry data, and the amount hereceives appears to be high. His compensation appears to be 15%above the industry norm. June Bigshot is an employee and earns$35,000 per year recorded in Other Salaries & Wages. Frominterviews and physical observation, it does not appear that shehas any responsibilities and is rarely at the business location.When Awesome opened the last 2 stores in 2014, they hiredexperienced managers. Each of these manager's earn $5,000 more thanthe managers in the other stores, this amount appears to be $3,000above the norm in the industry.
4. Selling Expenses
This category includes numerous expense items. The Advertisingand Promotion category is significantly higher in 2014 compared toprevious years. The marketing manager told you Awesome redesignedall their literature in 2014. The cost of the design work andprinting costs was $550,000.
After careful analysis, you notice that the Travel andEntertainment category has increased steadily since 2010. Afterasking questions, you discover personal trips that were paid for bythe company. The annual amount for these trips, is as follows: 2012= $80,259; 2013 = $120,000; and 2014 = $200,000.
Other Selling Expenses, includes expenses for a condo owned bythe company. The condo was acquired in 2010, and was capitalized asan Investment on the Balance Sheet (see Investments below). Thecompany has incurred $20,000 per year for the upkeep of the condofrom 2010 - 2014. Also, in this category there is$23,000 in 2013and $500,000 in 2012 related to an employee strike. The strike wassettled and management does not anticipate any strikes in thefuture. Related to the strike the legal fees to handle thesituation were $100,500 in 2013 and$80,750 in 2012. The legal feeswere included in the General & Administrative section.
5. General & Administrative
The insurance account has increased significantly. Most of theadditional cost is due to the opening of the new stores. However,there is $10,000 per year of property insurance on the condo, and$12,500 per year of real estate taxes for the condo. The two storesopened in 2014 are in a specialty area, and the rent paid issignificantly higher than the other stores. The rent for each ofthese stores is$48,000 per year, and the average rent for the otherstores is $30,000 per year. The use of office supplies appears tobe very inconsistent. The amount fluctuates greatly from year toyear, but you could not find any reason for this. In each year,that new stores were opened, the company took the maximum deductionfor Section 179 expenses of $18,500. This amount is recorded in theDepreciation Section. Under normal circumstances these assets wouldbe depreciated over a 5 year period using straight linedepreciation.
6. Investments
The condominium was acquired in 2010 for $190,000. Thecondominium was depreciated on the straight line basis over 30years, starting at the beginning of 2010 with the land valued at$10,000. The balance in the Investment account was reducedaccordingly, instead of showing accumulated depreciation and thedepreciation expense was recorded in Other Expenses under theGeneral & Administrative category. The balance in theInvestment account represents stock that Mr. Bigshot trades on aregular basis. No gains or losses were incurred on theseinvestments.
7. Dividends
Dividends of $100,000 were paid in 2011.
8. Advances from Affiliates
This account represents funds borrowed from another companyowned by Mr. Bigshot. Awesome pays a fair rate of interest on thefunds borrow
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| ii' | | | 0.1 | SCHEDULE 1 | | Preparer'sName | | | | | |
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| | | | Unadjusted Balance Sheets | | | | | | |
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