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money; she doesn’t seem to know why Chloe’s Closet has little money left,
despite an increase to the business’ net profit. Hence, in order to solve the
mystery of the missing money, upon where it went, the following analyses
were prepared.
Chloe’s Closet
Statement of Financial Position
As of November 30, 2015
(With Comparative Figures for 2014)
Increase
2014 2015 (Decrease) Percent
Amount
Assets
Cash 270 000 60 000 (210 000) (77.78%)
Accounts Receivables 500 000 740 000 240 000 48%
Inventory 400 000 600 000 200 000 50%
Machinery 850 000 800 000 (50 000) 5.88%
TOTAL ASSETS 2 020 000 2 200 000 180 000 8.91%
Liabilities and Equity
Accounts Payable 500 000 400 000 (100 000) (20%)
Total Liabilities 500 000 400 000 (100 000) (20%)
Capital Stock 200 000 200 000 0 0%
Accumulated Profit 1 320 000 1 600 000 280 000 21.21%
Total Equity 1 520 000 1 800 000 280 000 21.21%
TOTAL LIABILITIES
2 020 000 2 200 000 180 000 8.91%
AND EQUITY
The first table shows the horizontal analysis of the Statement of Financial Position of
Chloe’s Closet for the years 2014-2015. Starting off with the assets of the business, it was
clearly shown that the business loss a significant amount of cash amounting to P210 000 or
77.78% cash decrease; the reason for why will be discussed later on. Likewise, the
machinery used by the business also decreased but this is due to the machinery’s
depreciation, so there is no avoiding that. However, the receivables and inventories of the
business increased by 48% and 50% respectively. Hence, Chloe’s closet inventory and
accounts receivables are too high which is usually bad for the business.
Moving on to the liabilities and equity of the business; Chloe’s Closet’s deeds
decreased in a year by 20%, P100 000, this means that 20% of the deeds of the business
were paid in a span of a year. The increase on receivables means that a little to non were
collected; therefore, in order to pay the 20% of the deeds, Chloe’s Closet had no other
choice but to use their cash at hand to pay, hence cash decrease.
Furthermore, the capital of the business did not increased a bit but the accumulated
profit did by 21.21%; the result of adding the net income of the business, lead to the
increase of the prior account mentioned. To understand the large amount of increase to the
accumulated profit caused by the net income, a horizontal analysis of the income statement
was conducted.
Chloe’s Closet
Statement of Income
For the period on November 30, 2015
(With Comparative Figures for 2014)
Increase
2014 2015 (Decrease) Percent
Amount
Sales 600 000 800 000 200 000 33.33%
Cost of Sales 225 000 300 000 75 000 33.33%
Operating Expense 105 000 100 000 (5 000) (4.76%)
Operating Income 270 000 400 000 130 000 48.15%
Machinery 81 000 120 000 39 000 48.15%
NET INCOME 189 000 280 000 91 000 48.15%
According to the table, the sales of the business rose significantly; however when
sales raises so do the cost of sales, both increased by 33.33% compared to last year’s data.
However, although not much, the operating expense of the business decreased by just
P5000 or 4.76%. Consequently, due to the increase on sales and decrease on operating the
operating income of the business rose by 48.15% despite the increase on cost of sales. On
the other hand, the largest increase on expense for the income statement was from the
machineries, it increased by as much as 48.15% or P39 000. Conversely, the increase on
sales was enough to suffice the increase on the machinery expense; sufficient enough that
the overall net income increased by 48.15% as well, as much as P91 000 additional net
profit.
On the other hand, the business’ does not have that much obligations to pay
amounting to about only 18.18% of the business’ total liabilities and equity. Therefore,
equity dominates the capital structure of the business, which is good.
Chloe’s Closet
Statement of Income
For the period on November 30, 2015
(With Comparative Figures for 2014)
Amount Component Percentages
2014 2015 2014 2015
The analyzations led to the final conclusions which are stated here. The sales for
2015 indeed increased but so do the expenses with the exemption of the operating
expense. However, after deducting all costs and expenses, the net income for 2015 still
surpasses that of 2014. Despite an increase on the net income, majority of which are not
collected, accounts receivables; the remaining income however, were used to pay for the
due obligations as well as to compensate for the increase in inventories. Subsequently, the
income for 2015 was insufficient for all the expenses; therefore, the existing cash balance of
2014 was used, resulting to the P60 000 remaining cash balance for 2015. Additionally, the
capital structure of the business seems to be healthy; where the capital of the business far
surpasses that of the obligation, with obligations only amounting to 18.18% of the total
liabilities and equity. However, most of the current assets, the non-current asset are the
machineries used for business, are inventories and accounts receivables; both of which are
growing. Therefore, no cash were stolen in the business, the low cash of P60 000 was the
result of the increase on cost and expenses, inventories, and accounts receivables, as well
as the liabilities coming into due.
The business is in a tight cash position right now, having insufficient cash to pay for
a P470 000 due obligations. Therefore, there are two choices, in order to pay for the
obligations, one is to obtain a loan and the other is to add an additional investment into the
business sufficient enough to breakeven or for a small cash gain for future expenses.
However, an additional investment is more favorable, for another loan to pay for the
obligations will only lead to further loans until the business is covered with liabilities.
In order to avoid situations like this again, the owner is encouraged to stop trying to
meet the demands of the business’ customers because upping the production of the
business will only add to more expenses; this led to a huge amount of surplus in the
inventory of the business. Inventories are not liquid enough to pay for the due obligations
and additional expenses, with the business pumping additional money to its inventories led
to it not having enough money to pay for the business’ other obligations. Therefore, the
production rate of the business must return to its normal rate in order for the previous
inventories to be sold; if the rate of production is not enough to keep a considerable
amount of inventories and that the business have sufficient capital, only then can it be
increased or expand by investing in more machineries and hiring more employees.
The last recommendation for the owner, is to collect and monitor the business’
receivables regularly, this can help in reducing the risk for bad debts as well as having a
better balance of cash and receivables that can be used to pay for any future obligations
and expenses.
Chloe Mendez the owner of Chloe’s Closet, a manufacturing clothing company. The
business operates for 8 hours a day from Monday to Sunday. The business, despite having
better competitors, has managed to grow with its demand increasing exponentially. The
business tries to keep meeting the demand of its customers but ultimately fails to do so.
On the date of December 4, 2015 Chloe received a billing for the P400 000
obligation from her raw material supplier that must be paid in the next 5 days, she also
needs to pay her employees a total of P70 000 for the following day. However, upon
checking her bank account it only has a P67 000 cash balance despite the increase in sales
from last year. No mistakes were seen in the financial statements of the business, so Chloe
wonders if her money was stolen or not.
College of the Holy Spirit of Tarlac
S.Y. 2019-2020
CHLOE’S CLOSET
The Mystery of the Missing Cash
Presented By:
Presented To:
HORIZONTAL ANALYSES
RECOMMENDATION
CASE BACKGROUND