CASE STUDY 23. Janet Janitorial and the Case of the Serious Service Business Financial Statement Analysis Case LEARNING OBJECTIVES: After completing this case, you should be able to Find financial irregularities in financial statements Analyze trends in account balances Perform horizontal, vertical, and trend analysis Compare financial ratios to industry averages Gain a better understanding of the accuracy/effort trade off Analyze the statement of cash flows As an accountant you are frequently asked to solve business or tax problems your friends encounter. Once again your accounting skills are called upon as a friend of yours, Janet Janitorial, asks you to look over her financial statements and advise her on them. She shares the following information: After 20 years of service at her prior job, Janet was tired of the same old, daily routine and looking for a career change. At a New Year's party, she was talking with an old high school friend who had started an office cleaning business ten years prior. This friend enthusiastically described the excellent earnings potential in the industry with substantially more demand than supply of janitorial companies in the market. In January, Janet decided to embrace the opportunity by quitting her job and starting a janitorial service, Acme Office Cleaning Services. She was fortunate that her friend from the New Year's party had more business than she could handle and was kind enough to refer this extra business to Janet. Janet's initial client was an office complex that she billed $20,000 per month. Janet purchased three vans, cleaning equipment, office furniture and office equipment for $200,000. She made subsequent purchases of equipment as reflected in the changes in the balance sheet accounts. A local bank loaned her $120,000 at 6% for 6 years and Janet used her personal savings to pay the remaining $80,000. Since she is the sole owner of the small business, she has been operating it as a sole proprietorship and has not issued any stock. She draws money out as needed rather than taking a salary. Janet lived off her savings and withdrew nothing for herself in the first year, using all her profits to grow the business. In Years 2 and 3, she withdrew about $5,000 a month. In Year 4 she only withdrew about $2,000 a month as things started looking bad. As the business seemed to recover in Year 5, she withdrew about $4,000 a month. ties are to sell janitorial services to office buildings as well as overs completion of the office cleaning jobs. She has a full-time administrative all of the accounting functions. Janet started her admin per year and has given her a small raise (296) every year. Addi tions. Janet started her administrative assistant at a salary of $3. Fase (2/0) every year. Additionally, there are four full-time Janitorial staff that help clean the office buildings. All four of these emplo working for Janet since day one. Each janitorial employee is paid $15 perc are paid every two weeks. Additionally, if the company has a good year, employees and administrative assistant by letting them split a bonus of 17 amount. The bonuses are paid in the following year when the compiled annual statements are made available and the bonus amounts can be calculated. She supp janitorial staff with temporary workers to eliminate any overt temporary workers to eliminate any overtime when business increases administrative assistant who handles in the office build every year. Addissistant at a salary of $35.000 our of these employees have been ployee is paid $15 per hour and all employees has a good year, she rewards the ating them split a bonus of 1% of the net income Is can be calculated. She supplements the For Years 1 and 2, Janet had external accountants prepare a compila had external accountants prepare a compilation report. For years > through 5, she had a different set of external accountants prepare the compl books are kept on an accrual basis of accounting in accordance with GAAP and Equipment is capitalized at cost and depreciated using the straight-line method o Cu che property (Janitorial Equipment and Vans 3 vears and Office Equipment and 5 years). ants prepare the compilation reports. The punting in accordance with GAAP and that Property & Assignment: Complete the sections of the "Janet Janitorial Spreadsheet" as directed below. Save the completed spreadsheet and submit on the course website on UAS Online by 11:59 pm on October 20, 2018 Download and save onto your computer the "Janet Janitorial Spreadsheet.xls" file. Review Janet's financial statements and identify accounts that indicate potential irregularities. Note that there are two tabs on the spreadsheet. Consider simultaneously evaluating accounts that have relationships, for example, consider analyzing accounts receivable with sales and bad debt expense. Analyze the trends in related accounts to determine which accounts do not follow an expected pattern. Utilize analytical techniques including horizontal trend analysis, i.e. dollar and percentage change in accounts from year-to-year. Also, conduct vertical trend analysis, i.e. balance sheet accounts as a percentage of total assets and expense accounts as a percentage of sales. As you perform your analysis, be aware of the cost and benefit of your time, do not spend time investigating accounts that have minor trend deviations. Once your analysis is completed. identify accounts that suggest further investigation. by using the drop-down selections for each cell and placing a "Y" (Yes - Investigate the account) in the cell related to the questionable account for the specific year in the "Students Answers" tab. Select an "N" (No - Account appears to be OK) in the cells related to accounts that appear OK and do not require further investigation. Explain why you would request further information for questionable accounts When finished, enter your name in cell B8 and save the completed "Student Answers" tab in the spreadsheet, then electronically submit your file on the course website on Blackboard. CASE STUDY 23. Janet Janitorial and the Case of the Serious Service Business Financial Statement Analysis Case LEARNING OBJECTIVES: After completing this case, you should be able to Find financial irregularities in financial statements Analyze trends in account balances Perform horizontal, vertical, and trend analysis Compare financial ratios to industry averages Gain a better understanding of the accuracy/effort trade off Analyze the statement of cash flows As an accountant you are frequently asked to solve business or tax problems your friends encounter. Once again your accounting skills are called upon as a friend of yours, Janet Janitorial, asks you to look over her financial statements and advise her on them. She shares the following information: After 20 years of service at her prior job, Janet was tired of the same old, daily routine and looking for a career change. At a New Year's party, she was talking with an old high school friend who had started an office cleaning business ten years prior. This friend enthusiastically described the excellent earnings potential in the industry with substantially more demand than supply of janitorial companies in the market. In January, Janet decided to embrace the opportunity by quitting her job and starting a janitorial service, Acme Office Cleaning Services. She was fortunate that her friend from the New Year's party had more business than she could handle and was kind enough to refer this extra business to Janet. Janet's initial client was an office complex that she billed $20,000 per month. Janet purchased three vans, cleaning equipment, office furniture and office equipment for $200,000. She made subsequent purchases of equipment as reflected in the changes in the balance sheet accounts. A local bank loaned her $120,000 at 6% for 6 years and Janet used her personal savings to pay the remaining $80,000. Since she is the sole owner of the small business, she has been operating it as a sole proprietorship and has not issued any stock. She draws money out as needed rather than taking a salary. Janet lived off her savings and withdrew nothing for herself in the first year, using all her profits to grow the business. In Years 2 and 3, she withdrew about $5,000 a month. In Year 4 she only withdrew about $2,000 a month as things started looking bad. As the business seemed to recover in Year 5, she withdrew about $4,000 a month. ties are to sell janitorial services to office buildings as well as overs completion of the office cleaning jobs. She has a full-time administrative all of the accounting functions. Janet started her admin per year and has given her a small raise (296) every year. Addi tions. Janet started her administrative assistant at a salary of $3. Fase (2/0) every year. Additionally, there are four full-time Janitorial staff that help clean the office buildings. All four of these emplo working for Janet since day one. Each janitorial employee is paid $15 perc are paid every two weeks. Additionally, if the company has a good year, employees and administrative assistant by letting them split a bonus of 17 amount. The bonuses are paid in the following year when the compiled annual statements are made available and the bonus amounts can be calculated. She supp janitorial staff with temporary workers to eliminate any overt temporary workers to eliminate any overtime when business increases administrative assistant who handles in the office build every year. Addissistant at a salary of $35.000 our of these employees have been ployee is paid $15 per hour and all employees has a good year, she rewards the ating them split a bonus of 1% of the net income Is can be calculated. She supplements the For Years 1 and 2, Janet had external accountants prepare a compila had external accountants prepare a compilation report. For years > through 5, she had a different set of external accountants prepare the compl books are kept on an accrual basis of accounting in accordance with GAAP and Equipment is capitalized at cost and depreciated using the straight-line method o Cu che property (Janitorial Equipment and Vans 3 vears and Office Equipment and 5 years). ants prepare the compilation reports. The punting in accordance with GAAP and that Property & Assignment: Complete the sections of the "Janet Janitorial Spreadsheet" as directed below. Save the completed spreadsheet and submit on the course website on UAS Online by 11:59 pm on October 20, 2018 Download and save onto your computer the "Janet Janitorial Spreadsheet.xls" file. Review Janet's financial statements and identify accounts that indicate potential irregularities. Note that there are two tabs on the spreadsheet. Consider simultaneously evaluating accounts that have relationships, for example, consider analyzing accounts receivable with sales and bad debt expense. Analyze the trends in related accounts to determine which accounts do not follow an expected pattern. Utilize analytical techniques including horizontal trend analysis, i.e. dollar and percentage change in accounts from year-to-year. Also, conduct vertical trend analysis, i.e. balance sheet accounts as a percentage of total assets and expense accounts as a percentage of sales. As you perform your analysis, be aware of the cost and benefit of your time, do not spend time investigating accounts that have minor trend deviations. Once your analysis is completed. identify accounts that suggest further investigation. by using the drop-down selections for each cell and placing a "Y" (Yes - Investigate the account) in the cell related to the questionable account for the specific year in the "Students Answers" tab. Select an "N" (No - Account appears to be OK) in the cells related to accounts that appear OK and do not require further investigation. Explain why you would request further information for questionable accounts When finished, enter your name in cell B8 and save the completed "Student Answers" tab in the spreadsheet, then electronically submit your file on the course website on Blackboard