Clients Last Name Goes Here 1 Katherine's Cakes Katherine's Cakes is a small business partnership that sells cakes

and provides catering services. The partnership offers a large portfolio of cake designs for any occasion as well as custom cakes which are made according to individual preferences of the client. Catering services are provided for large variety of events ranging from small family meetings to large weddings. Katherine's Cakes operates in the premium segment and uses only high-quality ingredients in its products to deliver maximum satisfaction to the clients. Katherine's Cakes was formed as a partnership one year ago. This type of business structure involves several individuals (Katherine and her two companions in this case) who start a business by contributing capital and assets for its operation and then manage it together. The main advantage of this type of business organization stem from its simplicity partners do not need to fill files for the government when the business is set up. Moreover, there is no need to manage complicated tax payments, as all partners simply pay individual taxes. However, several disadvantages should also be mentioned. First of all, employee benefits are not tax-deductible as they are for the corporations. Secondly, profits are split up according to the partnership agreement that is signed when the business is established, which may lead to disputes between the partners in the future. Finally, partners are jointly liable with all their assets for all debts and obligations of the business. All in all, partnership is a good choice for the start-up business; however, Katherine and her partners are thinking of transforming their business to Limited Liabilities Company (LLC) after several years of operation. Bakery and catering business requires establishing a kitchen where all products are prepared. Although partners have decided to rent a place for the kitchen (so there is no need to invest in it), they still needed to acquire all kitchenware and equipment. Two most expensive

Clients Last Name Goes Here 2 positions were the oven and the large fridge. Fortunately, Katherine and partners managed to buy both items from the local restaurant that was expanding and has been selling its used equipment in a very good condition. Partnership has paid $20,000 for the oven and $10,000 for the fridge. All other kitchenware including tables and sinks was bought for approximately $10,000. Besides, the nature of business operations required a vehicle that made it possible to deliver goods to the customers. One of the partners has contributed his own van for this purpose with estimated price of $15,000. Finally, such assets as logo and web-site were created by Katherine on her personal computer and did not require any investment. Switching to on-going costs, partners have rented a location nearby the centre of the city for $500 a month and pay approximately $100 in utility expenses and insurance. Currently, all the work is done by the three partners, which means that they do not have any employees and pay no wages. The financing of Katherines Cakes is made by the combination of contributed capital and a bank loan. Katherine has contributed $15,000 of her personal money, one of her partners has contributed $10,000 and second partner contributed a van for $15,000. Thus, partnership raised $40,000 in contributed capital and filed for a $25,000 loan from a bank. The type of loan was fully-drawn, which means that full amount is received by the borrowers at once. Residence of the business partners in the area helped to get a low rate of 6% combined with loan period of 2 years. This implies that monthly payment is only $125. Thus, newly-established business has raised $65,000 and invested $55,000 in long-term assets which means that they had $10,000 in cash to start operations. In order to track performance of the business, partners decided to run careful bookkeeping. All business operations, including purchase of supplies and clients payments were recorded in the journal on a daily basis. The type of recording was job-based, which means that

Clients Last Name Goes Here 3 for all orders (cake or catering for the event) records were kept separately. Although such type of recording is quite complicated, it helped partners to ensure that all orders bring profit for them. At the end of each month Katherine (who received training in accounting, by the way) have reviewed the journals and constructed balance sheet and income statement. The former included all companys assets and liabilities up to end of the month and the latter summarized all revenues and costs that incurred during the last month. Finally, partners also decided to review the performance of the business at the end of the first year of operation. Katherine has prepared closing balance for the year and income statement for the operational year, which may be found in the Appendix. In order to analyse business performance, Katherine and partners decided to employ a variety of approaches. First of all, horizontal analysis was conducted. It involved comparison of values from balance sheets for the beginning of the year and the end of the year. As cash and current assets almost doubled, partners decided that business performed well. For the income statement, horizontal analysis was yet complicated, as only one year has passed since the business was established and for the recent year there was no data to compare with. However, vertical analysis came in help when income statement was considered. Taking sales as 100%, it was possible to estimate that gross margin was as high as 75%, while net income margin was 28%. This implies that the business is highly profitable. To ensure this, ratio analysis was conducted. It was estimated that return on assets was 12%, while return on capital was 24%. This is much higher than for other investment options (like bank deposits) may offer so in terms of profitability partners felt satisfied. Liquidity ratios such as cash ratio and cash ratio are roughly 15, which imply that business is healthy and has enough cash to pay for its short-term liabilities.

Clients Last Name Goes Here 4 Thus, it was concluded that Katherines Cakes has had a successful first year of operation and partners decided to continue operations.

Appendix: Financial Statements Katherines Cakes Balance sheet Year Start, 31 July 2011 Assets Current assets Cash Inventory Accounts Recievable Total Long-term assets Long-term assets Accumulated depreciation Total Total Assets Liabilities and capital Current liabilities Accounts Payable Total Long-term liabilities Bank loan Total Contributed Capital Retained Earnings Total liabilities and capital

Year End, 31 July 2012

$10,000 $0 $0 $10,000 $55,000 $0 $55,000 $65,000

$18,900 $1,275 $400 $20,575 $50,000 $5,000 $55,000 $75,575

$0 $0 $25,000 $25,000 $40,000 $0 $65,000

$1,270 $1,270 $25,000 $25,000 $40,000 $9,305 $75,575

Clients Last Name Goes Here 5 Katherines Cakes Income statement For the financial year ended 31 July 2012 Sales $32,905 Cost of sales $8,700 Gross Margin $24,205 Expenses Rent $7,200 Utility and insurnace $1,200 Depreciation $5,000 Total Operating Expense $13,400 Interest $1,500 Total expenses $14,900 Net Income $9,305

Clients Last Name Goes Here 6 References Needles, B. E. & Powers, M., 2010. Financial Accounting, Cengage Learning. Nottonson, I., 2007. Forming a Partnership : And Making It Work, Entrepreneur Press.