Identifying Accounting Issues, Performing Analysis, and Making Recommendations
University Canada West
ACCT 621 – Winter
Professor Yasamin Alami
27th February 2022
Executive Summary
Sky’s Skateboard is a small-scale business owned and managed by Sky, aged 19 years
old. Currently, the business is engaged in adding designs to skateboards of friends and
relatives. However, the increasing popularity of Sky’s work has created a business
opportunity in the market for her. Thereby, this available opportunity and connected business
expansion options were analyzed in qualitative and quantitative terms throughout this report
to make the most appropriate recommendations.
Accordingly, Sky can give up her current business and start the proposed new
business. However, this would expose her to more challenges due to financial constraints and
her lack of expertise and experience in the business field. If continuing with the proposed
business, Sky has various expansion options, such as opening an online business or setting up
a retail store. These would expose her to more challenges since she would require further
investments for these expansions. Nevertheless, Sky also has the opportunity to turn the
business structure from sole proprietorship to a partnership in overcoming these challenges.
Moreover, Sky can also attend college instead of engaging in business, which needs to be
analyzed parallel to all the areas mentioned above.
Simultaneously, the benefits and drawbacks of operating as a sole proprietorship were
looked into during this report. Also, the ethics that would be important to Sky during the
business operations will be highlighted. At last, the most appropriate recommendations would
be provided to Sky based on the analysis performed. The recommendations would be based
on quantitative values and qualitative factors and the decision to be made is within the hands
of Sky.
Issues
Several issues could be identified in relation to Sky’s Skateboard business. The first
issue would be deciding whether Sky should give up on her existing business and start her
proposed business. Sky has observed a decrease in demand for her current business of adding
designs for the skateboards of friends and cousins. Hence, she is expecting to start a new
business that sells skateboards either with a normal or a customized design. Thereby, she
would have to identify the most feasible option out of her existing business and new business.
The second issue will be to decide the advertising frequency if she starts her new
business. Accordingly, sky has the option to print and distribute newsletters every other
month or every month. Therefore, she would be required to compare the costs and benefits
associated with each method and decide the feasible marketing option to use.
Thirdly, Sky would have to determine whether to open an online or a physical retail
store. Accordingly, she could open an online business and parallelly continue this with her
current proposed business. Otherwise, Sky could move out of her parent’s garage and open a
new store. Thereby, she has to identify the most appropriate decision to be taken out of these
two options.
With this, Sky will have to decide on the most appropriate financing option for the
new machine, which could be identified as the fourth issue. Accordingly, Sky has to
determine if she will obtain a bank loan and purchase the new machine. Or else she has to
decide whether she will get a lease to invest in the same machine.
The fifth issue for Sky would be to decide whether to go for debt financing or equity
financing. That is to determine if she will obtain the bank loan and purchase the new machine
through debt financing; otherwise, whether she will give 30% of her business’s stake to
Libby and proceed with equity financing.
The final issue would be whether Sky should give up on her business and continue
going to college. Accordingly, she will have to compare the costs and benefits associated
with each option before making a final decision.
Analysis
SWOT Analysis for Sky’s Skateboard Business
Strengths, Weaknesses, Opportunities and Threat analysis (SWOT Analysis) could be
performed for Sky’s Skateboard business as follows. Accordingly, Strengths and Weaknesses
could be identified relating to the internal environment, whereas Opportunities and Threats
could be identified relating to the external environment.
Strengths
Sky has grown up with boarders, and this experience with the use of skateboards is a
great strength for the business. Simultaneously, Sky’s enthusiasm has provided the
foundation for her business journey. Also, the support she is receiving from the family is a
definite plus point, which is confirmed by the fact that her parents have allowed using the
garage for business activities. Moreover, being the business’s sole owner, Sky would make
independent decisions and develop closer relationships with the customers.
Weaknesses
Sky is still at the age of 19; she might lack the required funds and the experience to
operate a business. Also, her business is a small-scale business, and therefore she will have to
incur high manufacturing costs due to the small volume of production associated (Weger,
2017). Not only that, being the only employee at her business, Sky seems to lack the required
resources and expertise to support the growth of the business.
Opportunities
The increasing popularity of Sky’s Skateboard designs highlights the opportunities
available to expand her business. Accordingly, as considered, she could open a business that
sells new skateboards with either normal designs or custom designs. Also, opening the new
business would generate more revenue for Sky, allowing her to expand the business’ product
portfolio. Moreover, Sky could build up an online business and carry out multiple businesses
parallelly: online and physical stores (Weger, 2017).
Threats
Sky is a small-scale start-up business, and hence, it would be challenging for her to
cope with well-established businesses. Also, these well-established businesses would be able
to keep a low markup, making it difficult for Sky to offer a similar price. Similarly, she
would lack access to external financing sources to facilitate the expansion of the business or
future investment decisions such as purchasing a machine. Moreover, further challenges
could be encountered due to different laws and regulations if she decided to open up the
online business and operate internationally.
Issue #1: should Sky give up her existing business and start the new business?
Quantitative analysis of existing and new business
Sky’s current business has a demand of 225 units and hence generates an annual net
profit of $2,250 (Appendix A). In contrast, the proposed new business is expected to have a
yearly demand of only 200 units. Accordingly, it would generate a net profit of $1,075 in the
next year if advertised every other month (Appendix D). However, sales, sales revenue and
net profit of new business show an increasing trend over time while the same of existing
business shows a decreasing trend.
Simultaneously, the new business allows Sky to charge a higher price for each unit at
$100 for normal design and $110 for customized design compared to the current selling price
of $30 per unit (Appendix F & E).
Pros of Sky’s existing business
If decided to continue with the existing business, Sky could have some potential cost
savings due to lower manufacturing costs when compared to the proposed new business.
Accordingly, the per-unit cost of the existing business amounts to $20, whereas it will be $90
and $98 per normal design and custom design, respectively, under new business (Appendix
C).
Simultaneously, advertising will not be needed, and hence Sky could save the
newsletter cost of $300 per month. Moreover, the time incurred in distributing these
newsletters could be utilized for the production activities. Also, the business currently has a
profit margin of 33%, which continues in the same range in the coming years (Appendix B).
Sky’s business is small-scale, so this could be considered as an acceptable profit margin.
Cons of Sky’s existing business
It is evident that demand for Sky’s current business is slowing down. Thereby, based
on forecasted figures, it could be seen that there is going to be a reduction in sales over the
years (Appendix B). Moreover, if this trend continues, there is a doubt over the existence and
growth of the current business. The fact that current demand varies based on seasons will also
significantly impact this. Simultaneously, under existing business, Sky charges only $30 per
customized skateboard design whereas, under new business, she can charge $100 for standard
design and $110 for customized design.
Pros of Sky’s new business
Sky has gained some popularity for her current work and has already started getting
new customers. She can increase this customer base by taking maximum benefit of word-ofmouth marketing. Also, starting the new business allows Sky to charge a higher price for her
product and earn more revenue. Moreover, she has the opportunity to expand her business
and its product portfolio.
Cons of Sky’s new business
As depicted in Appendix D, the new business would require more materials leading to
an increased per-unit manufacturing cost. Moreover, Sky would have to make some initial
investment to start the new company. However, finding the required funds would be
challenging considering Sky’s age and the size of the business. Also, together with the
expansion, Sky would have to compete with well-established similar entities and hence
would face more challenges.
Issue #2: Should Sky advertise every month or every other month?
Quantitative analysis of two advertising options
Sky has two advertising alternatives under the proposed business. That is to continue
with advertising every other month or every month. Accordingly, if advertised every other
month, she will have to do advertising for six months within a year. Thereby, a total
advertising cost of $1,800 will have to be incurred, resulting in a net profit of $1,050 per
annum (Appendix G).
Nevertheless, if decide to advertise every month throughout the year, a total
advertising cost of $3,600, which is twice the previous cost, will have to be incurred
(Appendix H). Thus, this cost would increase her sales by 10%, which seems pleasing.
However, when analyzed in detail, it could be observed that the net profit would reduce by
144% if advertised every month, as shown below.
Figure 1
Pros of using a newsletter
A newsletter is a cost-effective marketing tool easily adapted by small businesses
such as Sky’s Skateboard. This is a more controllable approach since Sky can personally
decide whom to distribute it. Her involvement in newsletter distribution can also be utilized
in exercising better control over this. Also, newsletters are directly distributed among the
target market and hence considered a direct marketing tool. Furthermore, since Sky is
personally involved in distributing the newsletter, she could better understand the receivers
and distribute it among identified potential customer groups (Blackwell, 1990).
Cons of using a newsletter
Designing a newsletter that addresses the entire target market is quite difficult. Also,
not everyone is capable of designing impressive newsletters. Therefore, there is a doubt over
the expertise of Libby in creating an appealing newsletter. Moreover, there is no way to
verify whether the message has reached the target market. Using printed newsletters is more
difficult since there is no track over what happens after the distribution. (Blackwell, 1990)
Issue #3: Should Sky go online or open a retail store?
Quantitative analysis of online and retail store options
By opening an online business, Sky would earn a sales revenue of $21,250. However,
this decision would result in a net loss of $1,150. This is mainly due to the shipping charges
and depreciation expenses associated with this approach (Appendix I).
On the other hand, if Sky opens the retail store, she could earn $42,500, twice the
online sales revenue. However, similar to online business, this would also result in a net loss
of $20,300. This loss has occurred mainly due to the annual rental expense of $24,000
(Appendix J).
Therefore, it could be seen that neither of the options is financially feasible in the near
run. However, when compared to, the online store has a less loss. Also, it could assume to
allow Sky to continue her proposed new business using her parent’s garage together with the
online business. Therefore, the decision-making process should pay adequate attention to
relevant qualitative factors relating to both options.
Pros of an online business
Operating through an online platform will allow Sky to enter new markets and serve a
global customer base beyond her current circle of boarders. This would allow her to grow her
business into an international business. Also, the business can operate irrespective of business
hours on a 24/7 basis. It was noted that companies using e-commerce platforms had increased
their sales by 7% from 2008 to 2018 (Orendorff, 2019, as cited in Andonov et al., 2021).
Simultaneously, Sky could even continue using her parent’s garage since the business
will operate online. Thereby, she could save some money, such as the annual rent of $24,000
to be paid if she opens a physical store. Moreover, Sky could communicate with her
customers closely and develop a close relationship with them by using this approach.
(Andonov et al., 2021).
Cons of an online business
Sky’s online business platform is not given in the information. However, if she plans
to develop a website and use e-commerce on a large scale, it would be challenging due to the
enormous investment cost associated with the relevant process. If Sky is going to use social
media such as Facebook and Instagram for this purpose, then this concern would not be
applicable.
Also, Sky needs to ensure that she has relevant technical feasibility to use those
platforms and carry out the business irrespective of the platform to be used. For instance, it
would require continuously sharing up-to-date information about the business, its products,
offers, and more details.
Moreover, it would require to be updated with applicable laws and regulations when
operating an online business. Because, as part of her business operations, she might serve
international customers and hence would require to be aware of relevant laws prevailing in
those countries. Simultaneously, proper care should be paid towards factors such as data
privacy of customer information and copyrights (Andonov et al., 2021).
Pros of retail business
Considering the nature of the product supplied by Sky’s Skateboard business, it might
be critical for the customers to physically examine and understand the factors such as quality
and safety of the skateboard. However, this cannot be facilitated when operating through an
online platform (Zhang et al., 2021).
On the other hand, a physical examination of a product would assist the customers in
making an enlightened decision. This would avoid customer complaints and dissatisfactions
(Zhang et al., 2021). Simultaneously, a physical store would add more value to a business
over the long run. The store itself can be used as a marketing tool to attract more customers.
Cons of retail business
It would be pretty challenging to find an attractive location to set up the store.
Similarly, renting out a retail space would require an initial investment, such as advance
payments. Not only that, but it would also require some initial investment to set up the retail
store before starting the business operations. Moreover, by moving to a new location, Sky
might have to deal with established competitors from that area.
Issue #4: Should Sky purchase or lease the machine?
Quantitative analysis of bank loan and lease
Acquisition of the machine through a bank loan will have two types of impact on
Sky’s net profit. Accordingly, an interest expense and a depreciation expense will be
recorded in the income statement. The total value of these expenses per annum amounts to
$2,575, reducing the net income by the same amount (Appendix K). However, the machine
would appear as a long-term asset in the balance sheet, while the bank loan would appear as a
long-term liability.
If Sky purchases the machine through a lease, she will only have to pay $200
monthly, leading towards an annual payment of $2,400. This same payment will be made
consistently throughout the 5-year lease period. As a result, the net income of Sky’s
skateboard business will reduce by $2,400 (Appendix L). However, under the lease option,
Sky will not receive the ownership of the machine, and hence an asset will not appear in the
balance sheet, and no liability will appear.
Pros of bank loan
Sky would receive the entire ownership of the machine without any involvement from
the bank. Hence, Sky could leisurely use and control it as she wishes without concern about
physical damages.
Cons of bank loan
There will be several other costs when obtaining a bank loan, such as application fees.
Also, sometimes it is impossible to get 100% of required funds through a bank, and they
request collateral before providing a loan.
At the same time, there will be loan covenants imposed by banks, up to which Sky
will have to comply with during the loan tenure. Not only that, but banks might also disagree
to provide funds if they realize that the machine is with less common use. (Madison Capital,
n.d.)
Pros of lease
Lease payments are recorded as an expense, and hence a liability will not be
recognized in the balance sheet. As a result, the balance sheet would appear healthier, which
would assist Sky when reaching for further funding. Also, it would be convenient when it
comes to forecasting and cash flow management since lease payments are made as fixed
payments (Macaulay, n.d.).
Cons of lease
Under some leases, the lessee would not receive the ownership of the asset. A similar
situation was assumed under Sky’s lease, and hence she would not receive the ownership of
the machine at the end of the fifth year. Also, the lease payments will impact profit since it is
recorded as an expense.
Moreover, though the lease is not recorded as a liability in the balance sheet, it will
have to be disclosed as part of financial statement notes. In that case, the investors or other
financial institutions would consider this item before pumping further funds into the business.
Issue #5: Should Sky go for debt financing or equity financing
Quantitative analysis of debt financing and equity financing
If Sky decides to obtain the bank loan and purchase the machine utilizing those funds,
it will fall under debt financing. As a result, interest expense will be recorded in the income
statement, resulting in a decrease in net profit by $575 annually.
On the other hand, If Sky decides to provide 30% of her business’ stake to Libby in
return for newsletter cost, newsletter distribution, and funding of the machine, it will be
considered an equity investment. Accordingly, if Libby joins the business, Sky no longer would
require obtaining the bank loan and could save up to $5,900, as depicted below (Appendix M).
Figure 2
Pros of debt financing
A bank loan will not impact Sky’s ownership stake in her business. Thereby, Sky
could keep complete control to herself and make independent decisions. Also, the
installments to be paid under debt financing are known in advance. Hence Sky could do
proper planning to honour these payments.
Cons of debt financing
Debt obtained would appear as a long-term liability in Sky’s balance sheet and impact
Sky’s solvency ratio. Also, it would be mandatory to comply with relevant loan covenants
issued by the bank. Any incompliance would expose Sky to more finance charges. Moreover,
it is difficult for a tiny business like Sky’s Skateboard to obtain a loan. This is because banks
mostly would request collateral to provide a loan.
Pros of equity financing
Once Libby joins Sky’s business, the business structure would change to a
partnership. As a result, Sky would share her liabilities with Libby. They can combine their
talents and knowledge for the betterment of the business. Accordingly, they could continue
advertising every month and benefit from a 10% sales volume increase without incurring
additional costs. Simultaneously, Sky could allocate more time to business operations since
Libby will distribute the newsletters. Moreover, Libby will fund the machinery acquisition,
and as a result, Sky could avoid costs relating to the bank loan.
Cons of equity financing
Libby’s arrival would make Sky lose complete control over her business. This
involves losing control and independent decision-making power, leading to potential
conflicts. Also, the business profits will have to be shared and thereby, Sky would only be
entitled to 70% of the business’ profit while the remaining 30% will be given to Libby.
Issue #6: Should Sky give up her business and go to college?
Quantitative analysis over Sky giving up her business and going to the college
During Sky’s first fours college years, she will not be making any earnings. Instead,
she would lose the business income that could have been earned during that period. This
would amount to around $8,000 loss. However, from year four onwards, Sky would be able
to engage in the job and earn more income when compared to her business income. This net
impact would amount to around $163,000 (Appendix M).
Pros of going to college
If Sky goes to college, she would be able to obtain a better education,
Cons of going to college
However, Sky might be more passionate about developing her own business
Pros of doing business
Sky could engage in doing something that she is passionate about.
Cons of doing business
If the business
Benefits and drawbacks of operating as a sole proprietor
Pros of a sole proprietorship
If she decides to start her new business, she could keep the entire profit of $1,075 to
herself (Appendix D).
Cons of a sole proprietorship
Sky would be
Feedback on Sky’s father’s comments
Any business needs…
Ethics applicable in the business
Ethical decision making
Sky is operating
Ethical financial reporting
Irrespective of being
Recommendations
The main recommendation for Sky would be to go to college. This appears to be
Sky’s most financially beneficial option since it generates more income during the next seven
years (Appendix N). Simultaneously, she could obtain the required knowledge and
competence by attending college. Moreover, engaging in a job would provide her with more
experience. Sky could later utilize this knowledge and experience to start her business after
becoming financially stable. However, it is vital to remember that a job will provide only a
fixed remuneration. Hence, by going to college, she might lose the opportunity of becoming a
successful entrepreneur.
Therefore, if Sky is more passionate about doing the business, she could proceed with
that option by undertaking a challenge, irrespective of the financial benefits associated with
going to college. Under such a situation, the first recommendation would be to give up on her
current business and start the proposed new business. This is because the new business
appears to be more financially viable over the long run. This is confirmed by its higher sales
revenue and increasing income and net profit trends (Appendix D & F).
Together with this, the second recommendation for Sky would be to carry out
advertising every other month since it seems to be more beneficial in financial terms. Even
though advertising every month is supposed to bring more revenue, the connected increasing
cost will put the business at a loss (Appendix G & H).
The third recommendation would be to proceed with opening the online store. Based
on the quantitative analysis performed, both these options lead towards a net loss. However,
the online store generates fewer losses when compared to. Also, Sky could continue the
proposed new business using the parent’s garage in parallel with the online store.
Sky's fourth and final recommendation would be to accept Libby’s offer and make
Libby a business partner of Sky’s Skateboards. With her presence, Libby would be bringing
the machine required for Sky’s online business and could save costs associated with
financing the machine acquisition. However, if Sky is not willing to share the control and
ownership of the business with Libby, then she would have to select a financing method to
acquire the machine. In that instance, leasing the machine would be the ideal option since it
would have less impact on the business's net profit.
Conclusion
Based on the quantitative and qualitative analysis performed, the key recommendation
for Sky would be to attend the college. However, if she is more interested in continuing her
business journey, she is recommended to give up on her current business and start the
proposed new business. Eventually, Sky could open an online store while continuing her
proposed new business. Thus, it is recommended for Sky to get the assistance of Libby for
her business and obtain the machinery by way of Libby’s investment. However, if Sky
prefers to keep the control to herself, the feasible option in financing the machine would be to
go for a lease.
References
Andonov, A., Dimitrov, G.P., & Totev, V. (2021). Impact of E-commerce on Business
Performance. TEM journal,Volume10(4),1558-1564.
https://doaj.org/article/412ea9a176224cc98f122aa3e97f47d1
Blackwell, G.(1990). The Press of business: Newsletters prove a powerful marketing tool.
Canadian Business, volume 63(7).
Jack, R.F. (n.d.). What form of ownership is best?. CPA Journal, volume 68(8), 46.
Kimmel, P. D., & Weygandt, J. J. (2019). Survey of Accounting, Enhanced eText (2nd ed.).
Wiley Global Education US.
Macaulay, C.(n.d.). 4 Benefits Of Equipment Leasing. SBBC.
https://smallbusinessbc.ca/article/starting-a-business-4-benefits-equipment-leasing/
Madison Capital. (n.d.). Loan vs. Lease. https://madisoncapital.com/about-leasing/loan-vslease/
Sexty, R.W. (2020). Canadian Business and Society: Ethics, Responsibilities and
Sustainability (5th ed.). McGraw Hill Canada.
Weger,P. (2017). Build Measure Learn – Validated learning applied to a skateboard start-up.
1-26. https://run.unl.pt/handle/10362/22395
Zhang, J.Z., Chang, C., & Neslin, S.A. (2021). How Physical Stores Enhance Customer
Value: The Importance of Product Inspection Depth. Journal of Marketing, 1-20.
Appendix
Appendix A
Analysis of used skateboard business
Note 01: Assumed that summer season contains 3 months in average.
Note 02: Per hour rate was determined as $15. This was based on minimum per hour rate
applicable within Canada as mentioned in https://www2.gov.bc.ca/gov/content/employmentbusiness/employment-standards-advice/employment-standards/wages/minimum-wage
Appendix B
Calculation of forecasted per unit values for Sky’s existing business
Note 03: Assumed that sales volume decreases by 10%.
Note 04: Assumed that sales revenue increase by 5%.
Note 05: Assumed that costs increased by 3%.
Preparation of existing and forecasted income statement
Appendix C
Analysis of per-unit manufacturing cost
Appendix D
Calculation of forecasted per unit values for Sky’s new business
Note 06: Assumed that Sky is going to advertise every other month.
Note 07: Assumed that sales volume increases by 10% annually.
Note 08: Assumed that sales revenue increase by 5%.
Note 09: Assumed that costs increased by 3%.
Preparation of forecasted income statement
Appendix E
Trend analysis for Sky’s existing business
Note 10: Considered the year 2022 as the base year for trend analysis calculation purposes.
Sample formula = (2023 value – 2022 value) / 2022 value
Note 11: Trend analysis was calculated only up to 2025 for analysis purposes.
Vertical analysis for Sky’s existing business
Appendix F
Trend analysis for Sky’s new business
Note 12: Considered the year 2023 as the base year for trend analysis calculation purposes.
Sample formula = (2024 value – 2023 value) / 2023 value
Note 13: Trend analysis was calculated only up to 2025 for analysis purposes.
Vertical analysis for Sky’s new business
Appendix G
Analysis of advertising every other month
Note 14: Assumed the sales units given are annual figures.
Note 15: Advertising will be done only during 6 months since the advertising frequency is
stated as every other month.
Appendix H
Analysis of advertising every month
Note 16: Sales volume increases by 10%, and all the other per-unit values remain the same as
mentioned under Appendix G.
Note 17: Advertising frequency will be 12 months since Sky is going to advertise every
month.
Appendix I
Analysis of Sky's online business
Note 18: It is mentioned that online sales would match Sky's upcoming year's sales. Hence
assumed that online sales volume will be the same as new business' upcoming year's sales
volume.
Note 19: Assumed useful life of the machine is five years. The lease to finance the machine
was provided for five years. Hence, useful life was determined as five years based on this.
Note 20: No newsletter cost will be incurred since this will be an online business.
Appendix J
Analysis of Sky's retail business
Note 21: Sales volume will be twice the current sales volume if a retail store is opened.
Note 22: Assumed no newsletters will be distributed if a retail store is opened.
Appendix K
Analysis of acquisition of machine through a bank loan
Note 23: Assumed that loan interest will be paid annually over five years.
Note 24: Assumed that loan tenure is five years and useful life of the machine is also five
years.
Income statement impact of obtaining the bank loan
Balance Sheet impact of obtaining the bank loan
Appendix L
Analysis of acquisition of machine through a lease
Note 25: Assumed that Sky won't receive the ownership of the leased asset at the end.
Summary of income statement impact of both bank loan and the lease
Appendix M
Analysis of Equity Financing
Note 26: Assumed that advertising will be performed every month if Libby joins Sky’s
business. Hence, advertising cost, if advertised every month, is considered.
Note 27: This is the net loss that occurs if Sky carries out advertising every month. This
profit was used to calculate adjusted net profit since it assumed that the business would
continue advertising every month once Libby joins.
Note 28: Since Libby will bear the newsletter cost, it will no longer impact the businesses’
net profit. Hence, it was added back to calculate the adjusted net profit.
Appendix N
Analysis of Sky going to college
Note 29: Prime interest rate charged for student loans obtained from
https://www.knockoutinterest.ca/get_the_facts#:~:text=What%20is%20the%20interest%20ch
arged,%2C%20and%20is%20currently%202.45%25
Note 30: Assumed that Sky will pay student loan interest annually.
Note 31: Assumed that student loan tenure is for seven years and will be paid off by the end
of the 7th year, once Sky completes the college and starts working.
Note 32: Net impact analysis was performed only until the year 2030. This covers the seven
years period provided in the information.