Running Head: EXECUTIVE SUMMARY e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e e 1
Executive Summary
ACC309
Southern New Hampshire University
June 20,2022
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This Peyton Approved executive summary will shed light on the comprehensive
income at the end of 2017. The executive summary will also highlight other comprehensive
income sources, issuance of debt or share, stockholder equity impact, changes in the recent tax
structure, and retained earnings per share. It will provide insights into how the current
performance, lease, and postretirement plans have an impact on the finances of the company.
In order to support the various claims, appropriate evidence will be used.
Peyton Approved does have other comprehensive income source. It is seen from the
marketable securities that are available at $5,500,000. It is available for sale. According to the
balance sheet of December 21, 2017, the marketable securities’ market value is found to be
$5,235,000. It clearly reflects a price difference of $265,000. It has not been recorded as net
income but as an unrealized loss (Kieso et al., 2019). However, as the value has not been
realized, it must be regarded as other comprehensive income. It is important to disclose the
losses and gains as other comprehensive income on the basis of rate in the market. It will
reflect the changes in the company’s equity apart from the net income of Peyton Approved.
Stockholder equity provides a clear picture of the capital invested by the stakeholders
on Peyton Approved and the retained earnings. The accuracy of these calculations is important
owing to their impact on the future stakeholder’s decisions. The ratio provides an
understanding of the profit made by the company per sale. In order to calculate the return on
equity of Peyton Approved, it is important to consider the net income and then divide it with
the balance sheet’s total equity (Kieso et al., 2019). While the net income found in the balance
sheet is $12,428,782.25, the total equity is $11,326,904.84. From the calculations, it is found
that the return on equity of Peyton Approved is 1.09. It means that the stockholders got a profit
of 109% on dollars invested. Within a time frame of six months, Peyton Approved plans to
add more 20,000 new customers to its new location. Therefore, it seems to be extremely
profitable.
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In order to calculate the retained earnings per share, the preferred dividends were subtracted
from net income and then divided by the outstanding shares. From the calculation,
(12,428,782.25 - 50,000) / 1,750,000, the earnings per share or EPS of Peyton Approved was
found to be $7.07. The increase in the EPS led to an increase in the willingness of the
stockholders to pay more. Peyton Approved requires an appropriate way to enhance its net
income in order to increase EPS. An increase in the net income would ultimately enable
Peyton Approved easily attract more stockholders. It would even make the exiting
stockholders to buy more stocks. The stockholders show interest in paying more for the
profitable company.
For the expansion plan of Peyton Approved, the issuance of preferred stock can prove
to be beneficial. It will allow Peyton Approved to get the required capital at a relatively lower
rate. The stockholders having preferred stock would even get dividend payments. It would be
a win-win situation for all the parties involved (Kieso et al., 2019). The addition of about
20,000 customers would also increase the EPS of Peyton Approved over time.
The deferred tax liability of Peyton Approved was found to be $52,325.25. It was due
to the latest change in the tax structure of the company, which stands at 25%. For the
depreciation of the book, Peyton Approved leverages a straight-line method. On the other
hand, it used MACRS for tax return depreciation. The deferred tax liability was calculated by
multiplying the MACRS depreciation difference, which is $209,301, by the latest tax rate of
25%. A Peyton Approved is a C Corp, the new tax is likely to have a negative impact on
Peyton Approved. The increase in the taxes will result in a decrease in Peyton Approved’s net
income. It can ultimately lower the EPS, thereby affecting the stockholders.
The capital lease can be stated as a lease transferring all the ownership benefits and
risks as in economic substance, a sale by the lessor and a purchase by the lessee. It is another
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option available in place of buying equipment for the company. Instead of making the full
payment of the six ovens required by Peyton Approved, they opt to lease them. It saved them
from an immediate debt. The capital lease was reported on the balance sheet of Peyton
Approved. It increased the total assets of the company (Kieso et al., 2019). The finalization of
the lease payments of the 6 ovens will result in ownership. It is important to record the
depreciation on the balance sheet of the company.
Postretirement plans are likely to have long-term and short-term financial impacts.
Currently, Peyton Approved has 60 employees and offers health insurance for retired
employees. The pension liability is estimated to be $107,041.70, while the health insurance
cost of the retired employees is $43,718.91. After the retirement of the employees, the pension
liability is spread in monthly increments. A majority of pension payments are inelastic and
allow easy estimation. The estimation of health insurance is difficult as not all employees will
get its benefits regularly. As no costs can be set, there is a chance that Peyton Approved will
face larger health insurance liabilities in comparison to original estimations.
At present, Peyton Approved is functioning well. A quick ratio will help in the
determination of the ability of the company to pay all the short-term obligations. The
calculation using the formula (current assets – inventory – prepaid expenses)/ current
liabilities. On calculation, (15,847,105-128,152.63-71,877.07)/4,122,072.16, the quick ration
of Peyton Approved is found to be 3.79. It indicates that the company is capable of covering
3.79 times its current liabilities.
While accounting for the encountered changes in a company, two methods can be
used. It includes prospective and retrospective. Retrospective adjustments demand the
revision of financial statements that has been already reported as if a new accounting principle
has been used. However, prospective adjustments don’t necessitate any changes to the
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previous statements. Only the current as well as future periods, are to be changed. The
prospective method requires adjustment of change in depreciation method and accounting
estimates. The use of the retrospective method requires adjustment to the reporting entities
changes. In the case of Peyton Approved, prospective adjustments were used to adjust the
postretirement benefits and depreciation adjustments.
Peyton Approved plans to maintain transparency and adhere to the regulations and
rules of GAAP. GAAP allows the company to maintain complete transparency and update the
employees and shareholders of the company relating to its financial health. It also allows for
meeting the regulations of FASB and SEC. Being up-to-date and transparent can help Peyton
Approved to stand out in the market.
The four-step analysis and error correction method was used to correct the errors. The
four steps are analysis of the error and identification of the recorded error, determination of the
journal entry which ought to be recorded, identification of additional errors, and preparation of
the correcting entries. The previous errors have been recorded as adjustments made to the
retained earnings. It is due to the closing of the previous expense and revenue accounts. The
steps were undertaken in order to correct the oven lease expenses and patent expenses of
Peyton Approved.
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References
Kieso, D. E., Weygandt, J. J., Warfield, T. D., Wiecek, I. M., & McConomy, B. J. (2019).
Intermediate Accounting, Volume 2. John Wiley & Sons.
