Analyzing Two Investments$$An Instructional Case to

Introduce Basic Financial Accounting Concepts

Wendy J$.$ Bailey

Janet A$.$ Samuels

Arizona State University

ABSTRACT: This case introduces basic financial accounting concepts to graduate business students in an

accounting orientation session $($i$.$e$.,$boot camp$).$ Students assume they have invested in two cupcake businesses

in Paris and they now want to determine which business performed best. Instructors can use this case, which

provides students an opportunity to compare two businesses, to achieve several learning objectives including those

related to accrual accounting $($i$.$e$.,$ when to record transactions$),$ the legal aspects of business $($i$.$e$.,$ company

structure, stock ownership, international accounting$),$ and the use of estimates in financial reporting $($i$.$e$.,$

depreciation, bad debts$).$ This case also introduces students to the three basic financial statements $($i$.$e$.,$ balance

sheet, income statement, statement of cash flows$),$ and the evaluation of financial results $($i$.$e$.,$ net income versus

cash flow, ratios$).$ We have found that this simple, straightforward case helps students feel more confident when

working with basic financial accounting concepts.

Keywords: introductory financial accounting; accrual accounting concepts; accounting orientation; accounting

$$boot camp.$$

CASE

You have two friends $($Jacques and Gilles$)$ who recently graduated from culinary school in France. You decided to

invest in two cupcake shops and each friend will run one of the shops. Each will have full discretion over establishing

and managing the businesses. On January $1,2018,$ you gave Jacques $50,000$ and Gilles $75,000$ to start the

businesses at the beginning of $2018$ in exchange for $5,000$ shares and $10,000$ shares of common stock, respectively. Jacques

and Gilles have each agreed to receive a starting salary of $40,000$ per year.

Jacques decided to focus on selling cupcakes directly to customers, so he opened a bakery and retail store in the $5$th

Arrondissement of Paris. On January $1,2018,$ he purchased equipment for $21,000$ and furniture for $11,000.$ At that time, he

also purchased a store for $600,000.$ He paid $30,000$ in cash and borrowed the remaining $570,000$ from a bank. The bank

loan has an interest rate of $6$ percent a year. Jacques pays interest on the $10$th of the month for the previous month$$s interest but

will pay no principal until January $1,2028,$ when the loan is due in full. Although the loan is for $10$ years, Jacques expects to

use the building for at least $30$ years.

Gilles decided to focus on selling cupcakes to restaurants and corporations, so he rented baking and office space in the $20$th

Arrondissement of Paris on January $1,2018.$ He purchased equipment for $24,000$ and a delivery truck for $30,000.$

Now, in early January $2019,$ you have flown to Paris from your home in the United States to meet with Jacques and Gilles

and discuss the results of your investments.

Jacques said: Business has been good. Customers come in and pay cash$1$ when they purchase the cupcakes. This year I

collected $410,000$ in cash from my customers. Throughout the year, I$$ve purchased and received $280,000$ in baking

and other supplies for the shop from various vendors. I pay cash when I purchase these items. I try to buy just what I

We thank Valaria P$.$ Vendrzyk $($editor$)$ and two anonymous reviewers for their insightful comments.

Supplemental materials can be accessed by clicking the links in Appendix C$.$

Editor$$s note: Accepted by Valaria P$.$ Vendrzyk.

Submitted: October $2017$

Accepted: July $2018$

Published Online: September $2018$

$1$ Many retail businesses consider credit cards from customers the same as cash because credit card companies transfer cash to the business within a few

days of the transaction.

$47$

need, so I only have about $100$ of unused supplies in the shop at any point in time. The shop is working out great and

the customers love it$.$ However, there has been more wear and tear on the furniture than I expected, so I$$ll be replacing

most of the furniture in the next few weeks and that will cost me $17,000.$ Fortunately, the equipment I purchased is

probably good for another three years.

Jacques continued: The bank loan isn$$t due until $2028$ and I$$ve been keeping current with the monthly interest payments of

$2,850.$ I$$ll be paying December$$s interest in the next few days. Also, I recently wrote you a dividend check for

$5,000.$ As we agreed, I received a salary of $40,000$ for the year. Currently, I have $41,650$ in the bank.

Gilles spoke next: I$$ve focused on selling to restaurants and corporations on credit, so they pay me later. I typically collect

money within $30$ days of making the sale. This year I sold $610,000$ of merchandise; however, as of year$-$end, I$$ve

only collected $550,000$ of this amount and my customers still owe me the remainder. With the state of the current

economy, I$$m worried about whether I$$ll be able to collect anywhere from $5,000$ t