Horse Vet, Llc: Transaction Analysis and Statement of Cash Flows Preparation (Option 1)

Abstract

This case pertains to the foundational underpinnings of the accounting process and the statement of cash flows. In Part I, students are not given a list of business events to record, but rather, they must ascertain what they were from a 2011 balance sheet, a 2012 balance sheet, and a 2012 income statement. Part II requires students to prepare a 2012 statement of cash flows using the same three financial statements as given for Part I. In Part III, students must rely on a 2011 balance sheet and a 2011 statement of cash flows to work backward to derive the 2010 year-end balance sheet. There are two versions of this case: The Option 2 case is a bit more challenging than the Option 1 case. Instructors should use Option 2 if they feel students are well grounded in their understanding of financial statement relationships and the customary financial reporting of a typical set of business events. Both cases reinforce students' learning related to the accounting process and the connectivity between the financial statements. Please note that only one version of the case should be used due to the existence of some overlap between the two. Excerpt UVA-C-2334 Rev. Oct. 8, 2019 HORSE VET, LLC: TRANSACTION ANALYSIS AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 2) Part I Sam Birch, like his brother Jeff (who owned Dog Concierges, LLC), was a financial novice. His passion, though, was horses, and after years of vet school, interning, and working for other horse vets, he had finally started his own veterinary practice in Virginia horse country. In its first five years, Horse Vet, LLC, had grown to about $ 1,000,000 in client billings—a major accomplishment he was deservedly proud of. Just as his brother had done with his business, Sam had put all his company's financial concerns in the hands of their sister, Jennifer Birch, now a successful CPA 500 miles away. Sam believed he was modestly accomplished when it came to crafting a financial story reflective of his business activities and accomplishments. He thought, however, that he needed an Accounting 101 refresher so that he could cement his understanding of the process of preparing and interpreting a basic set of business financial statements. Such an understanding would be key when he talked to his banker next month about a $ 400,000 line of credit he needed to expand his business into two adjoining counties. Jeff had shared with Sam the diagram Jennifer had prepared for him the previous year (see Exhibit 1). Sam had found it fairly intuitive—especially when he thought about it as an organized way of depicting his personal finances. Assets (A) = Liabilities (L) + Owners' Equity (OE) perfectly captured, for example, the financial profile associated with the new home he had recently purchased. His name was on the title to the house, thus the $ 460,000 he had paid for it represented a personal asset. Moreover, he had financed its purchase with a $ 300,000 mortgage after having made a down payment of $ 160,000 from his personal savings. Thus, the personal version of A = L + OE applied to just his house was $ 460,000 = $ 300,000 + $ 160,000. So he was comfortable with Jennifer's suggested starting point. . . .