UV6489

Aug. 9, 2012

HORSE VET, LLC: TRANSACTION ANALYSIS

AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)

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 billingsa major
accomplishment he was deservedly proud of. Just as his brother had done with his business, Sam
had put all his companys financial concerns in the hands of their sister, Jennifer Birch, now a
successful CPA 500 miles away. Sam believed he had a pretty good handle on the day-to-day
running of the business, but he was clueless when it came to crafting a financial story reflective
of his business activities and accomplishments. Up until now, if there were adequate balances in
the business checking account and the family checking account, he was happy. He thought,
however, that he needed an Accounting 101 tutorial so that he would have some simple
understanding of the process of preparing and interpreting a basic set of business financial
statements. He couldnt avoid raising his financial acumen any longer. 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 intuitiveespecially 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
thought he understood Jennifers starting point.

This case was prepared by Mark E. Haskins, Professor of Business Administration. It was written as a basis for
discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 2012
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any meanselectronic, mechanical,
photocopying, recording, or otherwisewithout the permission of the Darden School Foundation.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-2-

UV6489

What he wanted to explore more extensively though, was how a variety of typical
business events would or would not be incorporated into this basic framework. As Jeff had
relayed to him, the key to keeping his financial records complete and correct was to always
adjust the Exhibit 1 component parts by asking these three questions for every business event,
all the while keeping the equality of the basic A = L + OE relationship true:
1. What parts of the diagram were affected by the business event?
2. In what direction (increase or decrease) were those parts affected?
3. By what dollar amount were they affected?

Sams Sample of Business Events

It was a cold, rainy, January morning. He had no farm visits to make today; the phone
had not been ringing with emergency call requests, the kids were at school, and his wife was out
for the day. It was the perfect time to try to be an accountant for a day. He jotted down some
notes regarding a summary of the business events that had transpired during 2012. For each of
those independent business events, he wanted to adjust the balance sheet Jennifer had given him
as of the end of 2011 (see Exhibit 2). To do so, he knew all he had to do was identify which part
of the 2011 balance sheet was affected, in what direction, and by what dollar amount. He also
realized two additional things: (1) he might have to add an account or two to the 2011 balance
sheet in order to capture all the appropriate financial effects and (2) he needed to be cognizant of
the detailed revenue and expense items affecting the balance sheets Retained Earnings account.
The 2012 business events he had codified to address were the following:
1. Had sold capital stock for $5,000 to his assistant.
2. Had purchased $638,000 of supplies on account.
3. Had billed clients $920,000 during the year for services rendered of which he had
collected $900,000 by years end.
4. Had used $642,000 of supplies during the year.
5. Had taken out a 6%, $12,000 loan from the bank on October 1, due in total on the
following October 1.
6. Had received notice that a client who owed him $1,500 had declared bankruptcy.
7. Had bought, just before year-end, a used, portable X-ray machine for $10,000 cash.
8. Had disbursed cash dividends of $10,000 each to the businesss two original investors.
9. Had paid $628,500 on accounts payable to various suppliers.
10. Had paid wages to himself and his assistant totaling $150,000.
11. Had needed to record $5,000 of annual depreciation on the barn and $2,000 on the truck.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-3-

UV6489

12. Had sold in January an old horse trailer he no longer needed for $13,000 cash. He had
paid $11,000 for it in early 2011 and had taken $1,000 of depreciation on it to date.
13. Had received a check, just before year-end, for $14,000, which represented his contracted
retainer fee, to serve as the local race tracks vet-on-site for the coming years slate of
seven races.
14. Had paid professional dues and licenses during the year totaling $1,900.
15. Had spent $3,000 for continuing professional education he was required to have.
16. Had given $1,000 to the local SPCA as a charitable donation.
17. Had been recommended by an older, retiring vet to his list of 300 clients. In sum, those
300 clients represented $800,000 of billings in the prior year. To date, about 80 of them
had contacted Sam.
18. Had sent out three Its Time To ____ mailings during the year to his client list. Each
mailing cost about $750.
19. Had set aside $2,500 to start building a restricted for use only during tough times fund
for the business.
20. Had paid $15,000 during the year to become a silent partner in a small grain cooperative.
21. Estimated, as the year came to an end, that he would need to spend about $4,200 in the
coming year to upgrade the medical equipment he carried on his truck.
22. Had paid out-of-pocket travel expenses of $96,000.
23. Had paid $2,000 in sales taxes previously accrued.

Part II
Using the information above, he was able to update the Exhibit 2 balance sheet and
arrive at the exact figures in the balance sheet and income statement for 2012 that Jennifer had
left him (Exhibit 3). He was quite pleased with himself. It was time to try his hand at
constructing a statement of cash flows.
As a road map of sorts, Jennifer had transformed the relationships depicted in Exhibit 1
to reflect the underlying fundamental construction of a statement of cash flows (see Exhibit 4).
Jennifer had repeated her admonition to Jeff for Sam: The statement of cash flows depicts the
change in cash by reporting the changes in all the other balance sheet accounts. Sam intended to
study the Exhibit 4 information prior to constructing and attempting to interpret this years
statement of cash flows. He wanted to be able to fully extract the insights conveyed in such a
statement. So using the net income and depreciation figures from the income statement in
Exhibit 3 along with the balance sheet changes he noted in the margin in Exhibit 5, he set out to
construct a statement of cash flows for 2012. Sam was confident he could do it.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-4-

UV6489

Part III
Sam finished his task sooner than he had expected. He was in a groove. He decided to
also use the companys statement of cash flows from 2011 (see Exhibit 6) and the balance sheet
as of the end of 2011 (see Exhibit 2) to re-create the balance sheet for the year ended 2010. He
thought he might even be finished before he had to start fixing dinner.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-5-

UV6489

Exhibit 1
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)
Details of the Basic Accounting Equation
Assets (A)

Liabilities (L)

Owners Equity (OE)

Current
Assets

Non-current
Assets

Current Non-current
Liabilities Liabilities

Cash
A/R
Inventory
Ppd/A

Buildings
Land
Vehicles
Investments

A/P
Bonds Payable
W/P
Long-term loan
Short-term
loan
I/P
T/P

Note:

A/R
Ppd/A
A/P
W/P
I/P
T/P

Contributed
Capital

Retained
Earnings

Net Income (Dividends)

Revenues (Expenses)

= accounts receivable
= prepaid assets
= accounts payable
= wages payable
= interest payable
=taxes payable

Source: Adapted from a similar exhibit presented in M. Haskins, The Secret Language of Financial Reports. (New
York: McGraw-Hill, 2008).

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-6-

UV6489

Exhibit 2
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)
Balance Sheet as of December 31

Cash
Accounts receivable
Inventory of supplies
Total current assets

2011
$ 45,000
9,000
21,000
75,000

Barn (net of accumulated depreciation)

Trailer (net of accumulated depreciation)
Truck (net of accumulated depreciation)
Total assets

56,000
10,000
29,100
$170,100

Accounts payable
Wages payable
Sales taxes payable
Total current liabilities

$ 8,700
2,000
3,300
14,000

Long-term debt*
Total liabilities
Common stock
Retained earnings
Total liabilities and owners equity

40,820
54,820
60,000
55,280
$170,100

* 5% interest is paid once a year on December 31. No principal is due for

10 years, when the total amount is due.
Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-7-

UV6489

Exhibit 3
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)

Balance Sheet as of December 31

Cash
Restricted cash
Accounts receivable
Inventory of supplies
Total current assets

2012
$ 54,809
2,500
27,500
17,000
101,809

Barn (net of accumulated depreciation)

X-ray machine (net of accumulated
depreciation)
Truck (net of accumulated depreciation)
Partnership investment
Total assets

10,000
27,100
_15,000
$204,909

Loan payablecurrent^
Interest payable
Accounts payable
Wages payable
Sales taxes payable
Unearned revenue
Total current liabilities

$ 12,000
180
18,200
2,000
1,300
14,000
47,680

Long-term debt*
Total liabilities
Common stock
Retained earnings
Total liabilities and owners equity

51,000

40,820
88,500
65,000
51,409
$204,909

*5% interest is paid once a year on December 31. No principal is due for nine
years, when the total amount is due.
^ One-year loan due October 1, 2013, 6% annual interest.
Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-8-

UV6489

Exhibit 3 (continued)
Income Statement
(for year ended December 31, 2012)
Sales
Cost of supplies used
Gross profit

$920,000
(642,000)
278,000

Gain on disposal
Depreciation expense
Travel expenses
Wages
Marketing
Dues and education
Interest expense
Bad debt expense
Miscellaneous expense
Net income

3,000
(7,000)
(96,000)
(150,000)
(2,250)
(4,900)
(2,221)
(1,500)
(1,000)
$ 16,129

Note: The business was not, and had not been for several years,
subject to income taxes due to a variety of special credits
and deductions on its tax returns.
Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-9-

UV6489

Exhibit 4
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)
General Derivation of Statement of Cash Flows

Panel A:
(1.) Assets = Liabilities + Owners Equity
(2.) Current Assets + Non-Current Assets = Current Liabilities + Non-Current Liabilities +
Contributed Capital + Retained Earnings
(3.) Cash + A/R + Inventory + Ppd/A + Vehicles + Buildings + Land + Investments = A/P +
W/P + Short-Term Loans + I/P + T/P + Bonds Payable + Long-Term Loans +
Contributed Capital + Retained Earnings
(4.) Cash = A/R Inventory Ppd/A Vehicles Buildings Land Investments + A/P +
W/P + Short-Term Loans + I/P + T/P + Bonds Payable + Long-Term Loans +
Contributed Capital + Retained Earnings
From the above, we can derive this Years Statement of Cash Flows as pertaining to the
changes in each of these items:
(5.) Cash = This Years Net Income A/R Inventory Ppd/A Vehicles
Buildings Land Investments + A/P + W/P + I/P + Short-Term Loans +
T/P + Bonds Payable + Long-Term Loans + Contributed Capital This Years
Dividends

Notes: (1) The delta () notation signifies this years change in.
(2) Retained Earnings = This Years Net Income This Years Dividends.
Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-10-

UV6489

Exhibit 4 (continued)

Panel B:
Section of the statement of cash flows
where the line item is usually presented
Net Income
A/R
Inventory
Ppd/A
+ A/P
+ I/P
+ T/P
+ W/P
Vehicles
Buildings*
Land
Investments
Short-term loans
+ Bonds payable
+ Long-term loans
+ Contributed capital
Dividends
Cash
+ Beginning cash
= Ending cash

Cash flows from operations

Cash flows from investing

Cash flows from financing

*There are three common waysassuming it is reported as net of accumulated depreciation

(which is the case here)in which a depreciable asset account such as buildings (or
vehicles) is likely to have changed during a year. The monetary amount of each should be
reported separately in a statement of cash flows. The three are (1) purchase payment(s) for
acquiring an additional building (to be reported in CFFI); (2) proceeds from sale (to be
reported in CFFI); and (3) depreciation expense for the year, which must be added back as a
noncash expense (to be reported in CFFO).
Source: Adapted from a similar exhibit presented in The Secret Language of Financial Reports.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-11-

UV6489

Exhibit 5
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)
Balance Sheets as of December 31
(in thousands)

Cash
Restricted cash
Accounts receivable
Inventory of supplies
Total current assets

2012
$ 54,809
2,500
27,500
17,000
101,809

2011
$ 45,000
--9,000
21,000
75,000

Change
+9,809
+2,500
+18,500
4,000

Barn (net of accumulated depreciation)

Trailer (net of accumulated depreciation)
X-ray machine (net of accumulated depreciation)
Truck (net of accumulated depreciation)
Partnership investment
Total assets

51,000
--10,000
27,100
_15,000
$204,909

56,000
10,000
--29,100
--$170,100

5,000
10,000
+10,000
2,000
+15,000

Loan payablecurrent
Interest payable
Accounts payable
Wages payable
Sales taxes payable
Unearned revenue
Total current liabilities

$ 12,000
180
18,200
2,000
1,300
14,000
47,680

$ --8,700
2,000
3,300
--14,000

+12,000
+180
+9,500
--2,000
+14,000

40,820
88,320

40,820
54,820

---

65,000
51,409
$204,909

60,000
55,280
$170,100

+5,000
3,871

Long-term debt
Total liabilities
Common stock
Retained earnings
Total liabilities and owners equity
Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.

-12-

UV6489

Exhibit 6
HORSE VET, LLC: TRANSACTION ANALYSIS
AND STATEMENT OF CASH FLOWS PREPARATION (OPTION 1)
Statement of Cash Flows
(for year ended December 31, 2011)

Net income
Depreciation
Changes in:
Accounts receivable
Inventory
Accounts payable
Sales taxes payable
Net cash flow from operations

$39,300
8,000

Purchase trailer
Net cash flow from investing

(11,000)
(11,000)

Proceeds from long-term loan

Dividends paid
Net cash flow from financing
Change in cash
Beginning cash
Ending cash

40,820
(20,000)
20,820
42,000
3,000
$45,000

(5,000)
(11,820)
2,700
(1,000)
32,180

Source: Created by case writer.

This document is authorized for use only in Basics of Accounting by Prof. Srikanth P, Prof. Vrishali N Bhat and Prof. Naveen Narayan, T.A. Pai Management Institute from June 2016 to
December 2016.