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Accounting Case Study - Highland Malt
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Complete financial accounting case study for Highland Malt with detailed analyses, charts, and financial statements
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Accounting Case StudyLearning Objectives
1. Prepare journal entries, T-accounts, multi-year balance sheets, income
statements,
and cash flow statements.
2. Analyze and critique financial statements, and use financial ratio analysis to
propose recommendations to improve the financial health of a business.
Project Description
● Read Highland Malt : Accounting Policy Choices in Financial Statements . Prepare
balance sheets, income statements, and cash flow statements for the Years 2018
and 2019 only, and then briefly discuss Highland Malt’s financial health and make
recommendations for improvements.
● Note that the main component of this case study is the successful creation of the
three financial statements (Balance Sheet, Income Statement, and Cash Flows
Statement).
● This task will require you to make certain assumptions about the firm’s business
operations, and to prepare all required journal entries and T-accounts (you do not
need to submit journal entries and T-accounts).
● The discussion section should be no more than one, single-spaced page, and
should be limited to:
• Key assumptions you made
• Financial ratio analyses you performed
• Recommendations you are making to improve the financial health of the
company.
● You are required to show your calculations for the following: Cash, Inventory,
Retained Earnings, Sales Revenues, COGS, and Operating Expenses. Additionally,
you are required to show how you calculated the financial ratios. You may show
your calculations in a separate part at the end of your project.
, ACCOUNTING CASE STUDY: HIGHLAND MALT INC.
The following key assumptions were made about the firm’s operations:
● For the purpose of calculating COGS, the FIFO method was used.
● Even though there were consumers that invested in whiskey but didn’t actually receive it for
12 years (these were investor collectors), the sale of whiskey was treated as revenue (as
opposed to a liability or deferred revenue).
● Although the sales of whiskey generated by Spencer are treated as revenue, Spencer owed
money to Highland Malt for some of these sales. The amount owed will be considered as
Accounts Receivable from Spencer.
● All fixed costs shown in Exhibit 3 are not included in calculating COGS, instead they are
categorized as SG&A expenses.
● 2018 had no rent expense, since customers had the responsibility of the warehousing costs.
● Bank loan was extended beyond year 2019. Current liability is assumed to start from 2019
based on maturity in 2020.
● For EPS, we assume for initial equity funding the company issued 10,000 shares priced at
$75/share. Record $750,000 as Paid-in Capital (Common stock). No dividends are paid.
● Transactions are represented in USD, despite the fact that the company was located in
Scotland.
The following key financial ratios were analyzed:
● Liquidity Ratios: a) The Current Ratio for 2019 was 16.9; b) The Quick Ratio for 2019 was
9.4
● Leverage Ratios: a) The Debt-to-Equity Ratio for 2018 was 0.067 and 0.063 for 2019; b)
The Debt-to-Assets ratio for 2018 was 0.063, and 0.059 for 2019.
● Efficiency Ratios: a) The Assets Turnover Ratio for 2019 was 3.05; b) The Inventory
Turnover Ratio for 2019 was 3.4; c) The Day Inventory Outstanding Ratio for 2019 was 107
● Profitability Ratios: a) The Return on Assets ratio (ROA) for 2018 was -0.63% & 5.92% for
2019; b) The Return on Equity ratio (ROE) for 2018 was -0.67% and for 2019 it was 6.29%;
c) The Gross Margin for 2019 was 32%; d) The Net Profit Margin for 2019 was 2%
Analysis of the financial health of the company:
● The income statements demonstrate that the business is experiencing high operating
expenses. It would be advisable to reduce costs (fixed and variable) to increase profits.
Recommendations to improve the financial health of the company:
● The company should devise a better policy of managing its unpaid receivables from Spencer
Spirits Inc. For instance, more defined payment terms and penalties for the exceeding the
payment terms.
● Reduce the SG&A. Primarily negotiate the sales commission, by using tiered commission
structure based on sales achievement. For instance, 8% commission for total sales of 1 until
100 barrels, then incrementally add 1% for another 100 barrels. The commission fee will be
capped for maximum 10%. The commission structure will be reset every year.
● Diversification of products for example DTC Direct to Consumer Brand or through own
ecommerce or marketing channel, thus eliminating middleman and having better margin. For
example, longer aged whisky as premium product lines.
● Increasing the price of barrel in 2020 to USD 11,000.
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