CASE ANALYSIS ON ‘MAYNARD COMPANY B’ (3-1)

I. I. BACKGROUND OF THE CASE

Diane Maynard owns all the stock of her company, “Maynard Company.” After her
bookkeeper quitted, she asked a friend to make balance sheets based on the book, left by
the bookkeeper, containing detailed record of the transactions of the company. She was
surprised that the cash increased by $31,677, considering that the net income was only
$19,635 for the month of June. She also learned that all accounts payable were to vendors
for purchase of merchandise inventory. The cost of sales in June was $39,345.

II. II. KEY PROBLEMS

● How can an income statement for June be prepared in proper format and explain the
derivation of each item, including the cost of sales?
● Why is the change in the cash balance greater than the net income?
● Why are the following amounts incorrect cost of sales amount for June and under
what circumstances would these amounts be correct cost of sales amount?
a. $ 14,715
b. $ 36,030

III. III. ANALYSIS

A. Cause/causes of the Problem
● Diane Maynard was surprised by the increased amount in cash by $31,677
despite the net income being only $19,635 due to the lack of data for the
basis of the difference between the two values
● Cash balance and net income are computed differently based on different
accounting systems
● We can assume that as owner of the business, Diane Maynard would want
to increase the net income for her company

B. Development of Alternatives
(1) Make an income statement for Maynard Company for the month of June
○ PROS:
■ Diane Maynard will be able to visualize the components that
contributed to the net income by the end of June
■ It will provide detailed information on costs and revenues
■ It will help Maynard Company analyze their expenses and can also
serve as information where they can see which components they
can focus to increase their revenues
 ■ It can serve as a database for potential investors for the company
since it can give a good picture of how the business is and what it
can become
○ CONS:
■ Tedious and more computations are needed and data to be taken
into account

(2) Devise a plan for a way to increase the net income for Maynard
Company
○ PROS:
■ Increase in net income will contribute greatly for the productivity
of the company
■ Cost consciousness will be increased and excess costs can be
identified which will reduce overspending for the company
○ CONS:
■ There may be a change in the system by which the company works
its way around may affect it negatively
■ Resistance to change so nothing will change that much

(3) Do away with the current status of Maynard Company for June and not
care about the discrepancy between the increase in cash and the net
income
○ PROS:
■ It will save the company time and effort since nothing will be done
○ CONS:
■ The problem regarding the difference between the increase in cash
and income will not be addressed
■ There will be no growth and improvement for Maynard Company
since the company’s transactions are not properly documented

C. Implementation of Chosen Alternative/s

After carefully thinking about which alternatives to be implemented for Maynard
Company, we decided to choose options (1) and (2).

(1) To address the problem of Diane Maynard of not knowing the reason
behind the difference between the increase in cash and net income, the
income statement for June will be made (shown in Table 1).

Table 1. Income statement of Maynard Company for the month of June.

MAYNARD COMPANY
Income Statement
June
Net Sales $70, 925
Deduct: Cost of Sales
Cash purchases of merchandise $14,715
 Credit purchases of merchandise $21,315
Merchandise Inventory, June 1 $29,835
Total goods available during June $65,865
Merchandise Inventory, June 30 $26,520
Cost of Sales $39,345 $39,345
Gross Margin $31,580
Deduct: Expenses
Wages $5,888
Utilities $900
Supplies $600
Insurance $324
Depreciation (Building and Equipment) $2,574
Miscellaneous $135
Expenses $10,421 $10,421
Income before income taxes $21,159
Deduct: tax expense 1,524
Net Income $19,635
Deduct: dividends 11,700
Retained earnings $7,935

Derivation of each item in the income statement for Maynard Company for the month of June:
(Note: Exh1 means data derived from Exhibit 1 of Case 3-1, 6/1 and 6/30 means data derived
from the Balance Sheet from Case 2-1)

NET SALES
= Cash sales (Exh1) + Credit sales (Exh1) + Increase in Accounts Receivable (6/30 – 6/1)
= $44,420 + $21,798 + ($26,505-$21,798)
= $70,925

COST OF SALES
= [Cash purchases of merchandise + Credit purchases of merchandise + Merchandise
Inventory (6/1)] – Merchandise Inventory (6/30)
= [$14,715 + $21,315 + $29,835] - $26,250
= $39,345

GROSS MARGIN
= Net sales – Cost of sales
= $70,925 - $39,345

EXPENSES
 Wages
= Wages paid (Exh1) + Increase in accrued wages payable (6/30 – 6/1)
= $5,660 + ($2,202 - $1,974)
= $5,888

 Utilities
 = Utilities Paid (Exh1)
= $900

 Supplies
= Cash purchases of supplies (Exh1) + Increase in supplies (6/30 – 6/1)
= $1,671 + ($6,630 - $5,559)
= $600

 Insurance
= Decrease in prepaid insurance (6/1 – 6/30)
= $3,150 - $2,826
= $324

 Depreciation: Building
= Increase in accumulated depreciation (6/30 – 6/1)
= $157,950 - $156,000
= $1,950

Depreciation: Equipment
= Increase in accumulated depreciation (6/30 – 6/1)
= $5,928 - $5,304
= $624

Total Depreciation
= Depreciation of Building + Depreciation of Equipment
= $1,950 + $624
= $2,574

 Miscellaneous (Exh1)
= $135

 Total Expenses
= Wages + Utilities + Supplies + Insurance + Depreciation + Miscellaneous
= $5,888 + $900 + $600 + $324 + $2,574 + $135
= $10,421

TAX EXPENSE
= Increase in taxes payable (6/30 – 6/1)
= $7,224 - $5,700
= $1,524

DIVIDEND (Exh1)
= $11,700

NET INCOME
 = Net sales – (Cost of sales + Expenses + Tax Expense)
= $70, 925 – ($39,345 + $10,421 + $1,524)
= $19,635

Through the income statement that was prepared, it can be noted that a net income of $19,635
was generated for the month of June for Maynard Company. The difference in values between
the increase in cash and the net income is due to the fact that the cash increase was viewed in the
basis of a cash basis accounting system through the balance sheet whereby an increase or a
decrease in cash is solely due to transactions where cash is the only factor considered. On the
other hand, net income is calculated on the basis of accrual accounting where expenses and
revenues are considered to which they both relate, regardless whether it has already been paid by
cash or not.

The cost of sales refers to the cost of the goods and services sold. It is expressed in the equation:

Cost of Sales = Merchandise Inventory Beginning + Purchases - Merchandise Inventory End

The given amounts would be correct cost of sales amount if the amounts of opening and closing
stock are the same, or:

Cost of Sales = Purchases

Classifying the cash purchases of merchandise, which is $14,715, as cost of sales is incorrect
since it only pertains to the amount of cash purchases and it failed to take into account the credit
purchases of merchandise and the merchandise inventory, which is not the same for June 1 and
June 30. Likewise, we cannot consider the $36,030, sum of cash and credit purchases, as cost of
sales since it also failed to account for the merchandise inventory.

(2) To help Maynard Company increase their net income, we can suggest that they
increase their cash and their credit sales. The company may also opt to maintain the same
inventory at the beginning and end of the month to decrease their cost of sales which in turn,
increases the net income.

D. Recommendations
● Consistency in doing the income statement monthly for Maynard
Company will enable them to evaluate their company’s performance in
terms of financial aspects and may consequently gain efficiency and
profitability as results
● It is also recommended for Maynard Company to have two accountants in
order to cross-check the transactions of the company and also to have
another bookkeeper in the event that one chooses to leave the company

IV. IV. CONCLUSION

The case exemplified a scenario where the owner of the company was not familiar
with the difference between identifying net income and a mere increase in cash on
the sole basis of looking into the balance sheet. This is a very important aspect to
know since decisions as to how the company should be operated are somewhat
dependent on these values. This case taught us how to generate an income
statement for a company and consequently know what factors are involved that
can affect the net income of the company.