AFRO-CARIBBEAN CRAFT PRODUCTS: A CASE IN BUDGETING AND FINANCIAL ANALYSIS 1

CASE DESCRIPTION

The primary subject matter of this case concerns Managerial Accounting. Specific issues examined include classifying costs based on changes in the level of productive activity, estimating cost functions, preparing budgeted financial statements, and computing and interpreting selected financial ratios. The case has a difficulty level of three. The case is designed to be taught in two class hours and is expected to require about six hours of outside preparation by students. CASE SYNOPSIS Afro-Caribbean Craft Products, a sole proprietorship, which operated on an itinerant basis from the owner’s home, was recently offered an attractive opportunity to lease space at an International Airport to establish a retail outlet. The proprietor (Ms. Earla John) estimated that she would need a $40,0002 loan to finance the capital and operating costs associated with the proposed retail outlet. Ms. John approached your accounting firm for help with the preparation of a set of projected financial statements requested by a potential financier. She provided a set of historical financial statements for the two most recent years and information about her expectations for the business in the coming year. Students are required to estimate the behavior of all cost items in the income statement and prepare a set of projected financial statements. They are also required to prepare a financial analysis using key ratios and to make a recommendation to the potential financier. This case helps to fill a gap in the pedagogical literature by focusing on the application of basic budgeting principles in a small scale, sole proprietorship setting. The three colleagues that have evaluated the case material all indicated that the specified objectives were effectively targeted in the case material. This case has been used in three sections of the Managerial Accounting course offered in the B.Sc. Accounting program at a medium-sized university in the Midwestern USA. Students were generally able to properly classify most of the income statements items, compute the project income statement, and projected statement of cash flow amounts and to prepare the required financial statements. Most students provided a well-reasoned recommendation regarding whether the loan should be granted to Ms. John. Students generally indicated that the case material was clear and realistic. INSTRUCTORS’ NOTES INTRODUCTION This case was designed for use in the Managerial Accounting course of the Bachelor in Accounting program offered at a medium-sized university in the mid-west USA. To be admitted into the course, students must have completed the Financial Accounting course with a grade C (70-79%) or better. The topics and the tools used by students to complete the case are very significant as they are used by organizations of all types and sizes to facilitate planning, control and performance evaluation. EDUCATIONAL RATIONALE AND OBJECTIVES The case had its genesis in the desire to diversify the range of instructional strategies used in the accounting program to better cater to the various learning styles of students and foster the development of their critical thinking skills. Currently, the primary instructional method used within the accounting program is the traditional lecture with highly structured problems and exercises. When attempts to locate suitable cases that integrated the desired aspects of the cost accounting syllabus proved futile, it was decided to develop an appropriate business case. This case helps to fill a gap in the pedagogical literature by focusing on the application of basic budgeting principles in a small scale, sole proprietorship setting. This setting was chosen because students are very likely to encounter such entities in their professional lives. The objectives of the case are to provide students with the opportunity to enhance their ability to (1) classify costs based changes in the volume of productive activity, (2) estimate cost functions using the high–low method, (3) prepare projected income statements, balance sheets and statements of cash flows, and (4) compute and interpret selected financial ratios.