Rocky Mountain Chocolate Factory Inc.

Preparing Financial Statements

Rocky Mountain Chocolate Factory, Inc., incorporated in 1982, is an international franchiser, confectionery manufacturer and retail operator in the United States, Canada and the United Arab Emirates. The Company manufactures an extensive line of premium chocolate candies and other confectionery products. The Company's revenues are derived from three principal sources: sales to franchisees and others of chocolates and other confectionery products manufactured by the Company; the collection of initial franchise fees and royalties from franchisees' sales; and sales at Company-owned stores of chocolates and other confectionery products. (Source: company Web site.)

Learning Objectives Understand how economic events are recorded in the financial statements. Appreciate the linkages between the balance sheet and the income statement. Be able to record transactions and adjustments in journal entry form. Prepare a simple set of financial statements. Distinguish between cash and accrual-basis accounting. To complete this case you need to develop a simple spreadsheet. The structure of the spreadsheet follows after the case questions. The spreadsheet does not use debits and credits, per se. However, you should understand that debits (credits) increase (decrease) asset and expense accounts. In contrast, credits (debits) increase (decrease) liability, owners equity, and revenue accounts. If you wish to check that each transaction balances in terms of debits and credits, simply define a row beneath the list of accounts such that Assets = Liabilities + Owners Equity + (Revenues Expenses). In other words, in each column, verify that Assets Liabilities OE Revenues + Expenses = 0. This will ensure that the sum of the debits equals the sum of the credits. Enter the opening (i.e., February 28, 2009) and ending (i.e., February 28, 2010) actual balance sheet or income statement balances into the accounts on your spreadsheet. Asset and expense accounts have debit balances, liability, shareholders equity, and sales accounts should have credit balances. The income statement accounts should have opening balances of $0. All figures are in thousands of dollars. A series of transactions has already been entered into the spreadsheet (see b. 11 later in the case). The column labeled Unadjusted trial balance should be defined so that each cell equals the sum of the opening balance and the transactions in that row. Each trial balance sum should be either a net debit or a net credit. The column labeled Pre-closing balances should be defined so that each cell equals the sum of the Unadjusted trial balance and the adjusting journal entries for each row. The column labeled Post-closing balances should be defined so that each cell equals the Pre-closing balance plus the closing entry in that row. The last column (i.e., February 28, 2010 F/S figures) serves as a check that you get to the correct year-end balances. The row labeled Retained Earnings should be used only for the dividend entry (#10), the large aggregate entry (#11), and the closing entry. All transaction and adjusting journal entries that affect income statement accounts should be posted to the income statement (revenue and expense) accounts and then closed to the row labeled Retained earnings in part i of the case.

. . a. Prior to examining the companys actual balance sheet, read the description of Rocky Mountain Chocolate Factory, above. What accounts do you expect to see on the balance sheet? Which are the major assets? Liabilities? . . b. Prepare journal entries, as needed, for each of the following fiscal 2010 transactions. All figures are in thousands of dollars.
1. The company purchased $7,500,000 of raw material inventory on account. On account means that their suppliers have not yet been paid. That is, Rocky Mountain Chocolate has an additional Account Payable for the inventory purchase. 2. During the year, the company incurred $6,000,000 of factory wages. When wages relate to the production of a companys inventory, the wage costs are added to the Inventory account. For now, assume that the wages have not yet been paid. 3. The company sold inventory that cost $14,000,000 for a total of $22,000,000. Of that, $17,000,000 was received in cash and $5,000,000 was on account (that is, added to Accounts Receivable). 4. The company paid $8,200,000 to suppliers for inventory it had previously purchased on account. That is, it paid $8,200,000 of accounts payable. 5. The company collected $4,100,000 of accounts receivable. 6. The company incurred Sales and Marketing Expenses of $1,505,431, General and Administrative Expenses of $2,044,569, and Retail Operating Expenses of $1,750,000. They paid $2,000,000 in cash and $3,300,000 was added to Other Accrued Expenses. 7. The company paid $6,423,789 to employees for wages that had been previously accrued. 8. Rocky Mountain Chocolate Factory received $125,000 in cash from new franchisees. The company must provide services to the franchisees over the next five years. As such, the fees are considered Deferred Income. 9. The company paid $498,832 for new property and equipment. 10. During the year, the company declared $2,407,167 of dividends on its common shares. They paid $2,403,458 during the fiscal year. The difference, $3,709, will be paid in the following fiscal year. 11. Many other transactions were recorded during the year. They are summarized in the spreadsheet. Do not attempt to interpret individual entries as many involve offsetting debits and credits and the resulting values are net figures.

c. Post the journal entries for the transactions to the spreadsheet. d. Prepare an unadjusted trial balance from the spreadsheet. Hint: the unadjusted balance for Retained Earnings is $3,343,850. e. Based on the transactions you recorded in parts b and c, list at least three adjustments or reclassifications that might need to be made prior to preparing the final financial statements. f. Prepare journal entries for the following adjustments.
12. Rocky Mountain Chocolate Factory employees took a physical count of inventory on February 28, 2010. The cost of inventory in the companys possession on that date was $3,281,447. 13. Depreciation and amortization expense on Property and Equipment was $698,580 for the fiscal year. 14. At year end, the company determined that $646,156 of wages were earned but remained unpaid. Of that total, $639,200 relates to general and administrative expenses, and $6,956 relates to retail operating expenses. 15. In February 2010, a consulting firm hired by Rocky Mountain Chocolate Factory issued a report stating that the Rocky Mountain Chocolate Factory brand name is worth $500,000.

g. Post the journal entries for the adjustments to the spreadsheet and complete the pre-closing trial balance column.

h. Construct an income statement for the year ended February 28, 2010. Use the headings from your spreadsheet rows as the account titles. i. Close all the temporary accounts on the income statement to Retained earnings. Complete the post-closing (ending) balance column. Verify that the amounts for the balance sheet accounts in the post-closing balance column match the amounts in the actual February 28, 2010 financial statement column. j. Prepare the February 28, 2010, balance sheet. Use the headings from your spreadsheet rows as the account titles. k. For each transaction, indicate whether the transaction would appear in the operating, investing, or financing section of the statement of cash flows.

ROCKY MOUNT AIN CHOCO LATE FACTOR Y, INC. STATEM ENTS OF INCOME

Rev enu es Sale s Fran chis e and roya lty fees Tota l reve nues Cost s and Exp ense s Cost of sales , excl usiv e of

depr eciat ion and amo rtiza tion expe nse of $33 6,00 9, $37 0,48 5 and $38 9,27 3, resp ectiv ely Fran chis e cost s Sale s& mar keti ng Gen eral and adm inist rativ e Reta il oper atin g Dep

1,499, 477

1,718, 595

1,498, 709

1,505, 431

1,495, 442

1,503, 224

2,422, 147

2,562, 280

2,505, 676

1,756, 956

1,107, 872

994,7 89

698,5

758,3

782,9

recia tion and amo rtiza tion Tota l cost s and expe nses Ope rati ng Inco me Oth er Inco me (Ex pens e) Inter est expe nse Inter est inco me Othe r, net Inco me Befo re Inco me

Tax es Inco me Tax Exp ense Net Inco me Basi c Ear ning s per Co mm on Sha re Dilu ted Ear ning s per Co mm on Sha re Wei ghte d Ave rage Co mm on Sha $ 2,090, 468 2,105, 972 3,053, 780

3,580, 077 .60

3,718, 563 .62

4,961, 376 .78

.58

.60

.76

6,012, 717

5,984, 791

6,341, 286

res Out stan ding Dilu tive Effe ct of Em ploy ee Stoc k Opti ons Wei ghte d Ave rage Co mm on Sha res Out stan ding , Ass umi ng Dilu tion

nts.

The accomp anying notes are an integral part of these stateme

ROCKY MOUNT AIN CHOCO LATE FACTO RY, INC. BALAN CE SHEET S

Assets Curren t Assets Cash and cash equival ents Accoun ts receiva ble, less allowan ce for doubtfu l account s of $395,2 91 and $332,7 19, respecti vely Notes receiva ble, current Invento ries, less reserve

for slow moving invento ry of $263,8 72 and $251,9 22, respecti vely Deferre d income taxes Other Total current assets Proper ty and Equip ment, Net Other Assets Notes receiva ble, less current portion Goodwi ll, net Intangi ble assets, net Other Total other assets Total assets $

461,249

369,197

220,163 12,224,5 36 5,186,70 9

224,378 10,141,8 66 5,253,59 8

263,650

124,452

1,046,94 4 110,025

1,046,94 4 183,135

88,050 1,508,66 9 18,919,9 14 $

91,057 1,445,58 8 16,841,0 52

Liabilit ies and Stockh olders Equity Curren t Liabilit ies Accoun ts payable Accrue d salaries and wages Other accrued expense s Dividen d payable Deferre d income Total current liabiliti es Deferr ed Income Taxes Commi tments and Contin gencies Stockh olders

Equity Preferre d stock, $.10 par value; 250,00 0 authori zed; 0 shares issued and outstan ding Series A Junior Particip ating Preferre d Stock, authori zed 50,000 shares Undesi gnated series, authori zed 200,00 0 shares Commo n stock, $.03 par value; 100,00 0,000 shares authori zed; 6,026,9

180,808

179,696

38 and 5,989,8 58 shares issued and outstan ding, respecti vely Additio nal paid-in capital Retaine d earning s

Total stockho lders equity Total liabiliti es and stockho lders equity $

14,731,3 37

13,241,9 93

18,919,9 14

16,841,0 52

The accompanying notes are an integral part of these statements.

Rocky Mountain Chocolate Factory Inc. Preparing Financial Statements

EXCERPTED WITH PERMISSION FROM

CASES IN FINANCIAL REPORTING

SEVENTH EDITION ISBN: 978-1-934319-79-6

ELLEN ENGEL D. ERIC HIRST MARY LEA MCANALLY