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NORTHCENTRAL UNIVERSITY
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Learner: Everett Durante Cordy

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SKS7000-8

Faculty Mentor: Dr. Terrence Kroeten

Doctoral Comprehensive Strategic

Knowledge Studies

Assignment 4 An Analysis of the Financial

and Accounting Processes for XYZ
Construction, Inc.

Please find attached hereto the paper for Assignment Number 4. Thanks.

Faculty Use Only

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Revised 11-10-05

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Abstract
XYZ Construction, Inc. is a privately owned company founded as a family business in the 1950s
(SKS7000 Syllabus, 2012, p. 2). The company specializes in horizontal construction work,
including roads, airfields and bridges. (SKS7000 Syllabus, 2012, p. 2). This paper critically
examines the key concepts and principles associated with financial management, accounting,
internal control, cash management, and Sarbanes-Oxley regulations for the company.
Specifically, this paper will provide a detailed review and explanation of the companys balance
sheet, income statement, operating cash flows, statement of retained earnings and net working
capital.

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AN ANALYSIS OF THE FINANCIAL AND ACCOUNTING PROCESSES

FOR
XYZ CONSTRUCTION, INC.

Introduction
XYZ Construction, Inc. is a privately owned company founded as a family business in the 1950s
(SKS7000 Syllabus, 2012, p. 2). The company specializes in horizontal construction work,
including roads, airfields and bridges. (SKS7000 Syllabus, 2012, p. 2). The owners have decided
to transform the business from one of private ownership to public ownership and plans for its
Initial Public Offering (IPO) in 12 months (SKS7000 Syllabus, 2012, p. 2). The companys
headquarters is located in Denver, Colorado, and has 16 field offices located in 11 states
(SKS7000 Syllabus, 2012, p. 2).
The Chief Financial Officer (CFO) for XYZ Construction Inc. has been promoted to the
newly created position of Vice President of Overseas Operations (SKS7000 Syllabus, 2012, p. 2).
The CFOs absence leaves a void in the knowledge base of the owners group regarding several
key financial and accounting principles (SKS7000 Syllabus, 2012, p. 2). The owners desire the
creation of a document that will help explain several key concepts and principles associated with
financial management, accounting, internal control, cash management, and Sarbanes-Oxley
regulations (SKS7000 Syllabus, 2012, p. 2).

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Accounting and Financial Statements Overview

Accounting is the information system that measures business activity, processes the data into
reports, and communicates the results to decision makers (SKS7000 Management VitalSource
eBook, p. 723). Accounting is the language of business (SKS7000 Management VitalSource
eBook, p. 723). A key product of accounting is a set of reports called financial
statements
(SKS7000 Management VitalSource eBook, p. 723). Financial statements
report on a business
in monetary terms (SKS7000 Management VitalSource eBook, p. 723). The
financial
statements summarize the transaction data into a form that is useful for decision making
(SKS7000 Management VitalSource eBook, p. 723). According to the SKS7000 Management
VitalSource eBook (2012, p. 740), the financial statements are the:

Income statement

Statement of owners equity

Balance sheet

Statement of cash flows

Income Statement
The income statement presents a summary of an entitys revenues and expenses for a
period of time, such as a month, quarter, or year. (SKS7000 Management VitalSource eBook, p.
740). The income statement, also called the statement of earnings or statement of operations, is
like a videoa moving picture of operations during the period (SKS7000 Management
VitalSource eBook, p. 740). According to SKS7000 Management VitalSource eBook, p. 740,
the income statement holds one of the most important pieces of information about a business:

Net income (total revenues greater than total expenses) or

Net loss (total expenses greater than total revenues)

The income statement is the first statement that can be prepared because the other financial
statements rely upon the net income number calculated on the income statement SKS
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Management VitalSource eBook, 2012, p. 778).

The income statement reports the profitability of the business (SKS7000 Management
VitalSource eBook, 2012, p. 778). To prepare an income statement, begin with the proper
Heading (SKS7000 Management VitalSource eBook, 2012, p. 778). A proper heading includes
the name of the company (XYZ Construction, Inc.), the name of the statement (Income
Statement), and the time period covered (Month Ended December 31, 2012) (SKS7000
Management VitalSource eBook, 2012, p. 778). Notice that the reporting of income is for a
period of time, rather than a single date (SKS7000 Management VitalSource eBook, 2012, p.
778).
The income statement lists all revenues and expenses (SKS7000 Management
VitalSource eBook, 2012, p. 778). According to SKS7000 Management VitalSource eBook
(2012, p. 778), the income statement uses the following formula to calculate net income:
Revenues Expenses = Net Income
First, you should list revenues (SKS7000 Management VitalSource eBook, 2012, p. 778).
Second, list the expenses (SKS7000 Management VitalSource eBook, 2012, p. 778). Having
trouble finding the revenues and expenses? (SKS7000 Management VitalSource eBook, 2012, p.
778). Look in the equity column of the accounting equation (SKS7000 Management VitalSource
eBook, 2012, p. 778). After you have listed and totaled the revenues and expenses, you subtract
the total expenses from total revenues to determine net income or net loss (SKS7000
Management VitalSource eBook, 2012, p. 778). If you have a positive number, then you will
record net income (SKS7000 Management VitalSource eBook, 2012, p. 778). A negative number
indicates that expenses exceeded revenues, and you will record this as a net loss (SKS7000
Management VitalSource eBook, 2012, p. 778). Net income is good news, and a net loss is bad
news (SKS7000 Management VitalSource eBook, p. 740).

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Statement of Owners Equity

The statement of owners equity shows the changes in owners equity during a time
period, such as a month, quarter, or year (SKS7000 Management VitalSource eBook, 2012, p.
740). According to SKS7000 Management VitalSource eBook (2012, p. 740):
The only increase in owners equity comes from

Net income (revenues exceed expenses)

Decreases in owners equity result from two things:

Withdrawals

Net loss (expenses exceed revenues)

To prepare a statement of owners equity, begin with the proper heading

(SKS7000
Management VitalSource eBook, 2012, p. 779). A proper heading includes
the name of the
company (XYZ Construction, Inc.), the name of the statement (Statement of
Owners Equity),
and the time period covered (Month Ended December 31, 2012) (SKS7000
Management
VitalSource eBook, 2012, p. 779). As with the income statement, Owners
Equity is reported
for a period of time, rather than a single date (SKS7000 Management
VitalSource eBook, 2012,
p. 779).
Net income is used on the statement of owners equity to calculate the
new balance in
owners equity (SKS7000 Management VitalSource eBook, 2012, p. 779) .
According to
SKS7000 Management VitalSource eBook (2012, p. 779), this calculation
uses the following
formula:
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Beginning Capital
+ Net Income (or Net Loss)
Withdrawals
Ending Capital
Start the body of the statement of owners equity with the capital at the
beginning of the
period (SKS7000 Management VitalSource eBook, 2012, p. 779). Then, list
net income
(SKS7000 Management VitalSource eBook, 2012, p. 779). You should notice
that the amount of
net income comes directly from the income statement (SKS7000
Management VitalSource
eBook, 2012, p. 779). Following net income you will list the withdrawals paid,
which reduces
capital (SKS7000 Management VitalSource eBook, 2012, p. 779). Finally, total
all amounts and
compute the capital at the end of the period (SKS7000 Management
VitalSource eBook, p. 779).
Balance Sheet
The balance sheet lists the entitys assets, liabilities, and owners equity as of a specific
date, usually the end of a month, quarter, or year (SKS7000 Management VitalSource eBook,
2012, p. 740). The balance sheet is like a snapshot of the entity (SKS7000 Management
VitalSource eBook, 2012, p. 740). For this reason, it is also called the statement of financial
Position (SKS7000 Management VitalSource eBook, 2012, p. 740).
To prepare a balance sheet, begin with the proper heading (SKS7000 Management
VitalSource eBook, p. 780). A proper heading includes the name of the company (XYZ
Construction, Inc.), the name of the statement (Balance Sheet), and the time period covered
(December 31, 2012) (SKS7000 Management VitalSource eBook, 2012, p. 780). Unlike the
income statement and statement of owners equity, we are reporting the financial position of the
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company for a specific date rather than a period of time (SKS7000 Management VitalSource
eBook, 2012, p. 780).
The balance sheet is a listing of all assets, liabilities, and equity, with the accounting equation
verified at the bottom (SKS7000 Management VitalSource eBook, 2012, p. 780). To prepare the
body of the statement, begin by listing assets (SKS7000 Management VitalSource eBook, 2012,
p. 780). Then you will record liabilities and owners equity (SKS7000 Management VitalSource
eBook, 2012, p. 780). Notice that the balance sheet is organized in the same order as the
accounting equation (SKS7000 Management VitalSource eBook, 2012, p.780). You should note
that the amount of Capital comes directly from the ending Capital on your statement of owners
equity (SKS7000 Management VitalSource eBook, 2012, p. 780). You should then total both
sides to make sure that they are equal (SKS7000 Management VitalSource eBook, 2012, p. 780).
If they are not equal, then you will need to look for an error (SKS7000 Management VitalSource
eBook, 2012, p. 780).
Statement of Cash Flows
The statement of cash flows reports the cash coming in (cash receipts) and the cash going
out (cash payments) during a period (SKS7000 Management VitalSource eBook, 2012, p. 740).
Business activities result in a net cash inflow or a net cash outflow (SKS7000 Management
VitalSource eBook, 2012, p. 740). The statement of cash flows reports the net increase or
decrease in cash during the period and the ending cash balance (SKS7000 Management
VitalSource eBook, 2012, p. 740).
Statement of Retained Earnings
According to InvestorWords.com, the statement of retained earnings is a document that
reflects the amount of income received for the fiscal year. Retained earnings means exactly
what the term implies, that portion of net income the company has kept over a period of years
(SKS7000 Management VitalSource eBook, 2012, p. 619). If, historically, revenue exceeds
expenses, the result will be a positive balance in retained earnings (SKS7000 Management
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VitalSource eBook, 2012, p. 619). On the other hand, if, historically, expenses have exceeded
sales revenues, the accumulation of these losses will result in an accumulated deficit in retained
earnings (usually shown in parentheses) (SKS7000 Management VitalSource eBook, 2012, p.
619). Net income or net loss flows from the income statement to the statement of retained
earnings (SKS7000 Management VitalSource eBook, 2012, p. 619).
Net income increases retained earnings, and net losses and dividends decrease retained
earnings (SKS7000 Management VitalSource eBook, 2012, p. 619) .

Net Working Capital

According to TheFreeDictionary.com (2012), net working capital is cash and short-term
assets expected to be converted to cash within a year less short-term liabilities. Businesses use
net working capital to measure cash flow and the ability to service debts
(TheFreeDictionary.com, 2012). A positive net working capital indicates that the firm
has money in order to maintain or expand its operations (TheFreeDictionary.com, 2012). Net
working capital tends not to add much to the business' assets, but helps keep it running on a dayto-day basis (TheFreeDictionay.com, 2012).
Internal Control
In the modern business world, corporate objectives and the environment in which
companies operate are constantly evolving (KPMG Review Internal Control: A Practical
Guide, 1999, p. 16). As a result, the risks facing companies are continually changing too (KPMG
Review Internal Control: A Practical Guide, 1999, p. 16). A successful system of internal
control must therefore be responsive to such changes - enabling adaptation quicker than its
competitors (KPMG Review Internal Control: A Practical Guide, 1999, p. 16). Effective risk
management and internal control is therefore reliant on a regular evaluation of the nature and
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extent of risks (KPGM Review Internal Control: A Practical Guide, 1999, p 16).
Internal controls are processes implemented in order to give a reasonable assurance that
the company will not become a fraud victim (Cosmin, 2011). Even so, a lot of internal
controls are paying a heavy tribute to their lack of efficiency and update (Cosmin, 2011). Thus,
for a correct functioning, internal controls must be monitored and assessed permanently in order
to preserve their strength and ability to fulfill their mission (Cosmin, 2011). This approach will
deliver more added value because rather than being corrected after they have already occurred,
the frauds related with the assets will be prevented, detected and reported at a timely moment,
thereby the incidence and value of those criminal activities will decrease significantly (Cosmin,
2011). Furthermore, because not only the process of monitoring is important but even the entity
conducting this activity we believe that internal audit is the most appropriate to undertake this
responsibility (Cosmin, 2011). Thus, through this material we opened a discussion about how
important permanent monitored and updated internal controls are in order to assure a proper
assets protection and why internal audit, rather than the management, should be the most
eligible to undertake this responsibility (Cosmin, 2011).
The Board is ultimately responsible for the system of internal control (KPGM Review
Internal Control: A Practical Guide, p. 18). Boards will normally delegate to management the
task of establishing, operating and monitoring the system, but they cannot delegate their
responsibility for it (KPGM Review Internal Control: A Practical Guide).
Cash Management
According to Investopedia (2012), cash management is the corporate process of
collecting, managing and (short-term) investing cash. A key component of ensuring a company's
financial stability and solvency (Investopedia, 2012). Frequently corporate treasurers or business
manager is responsible for overall cash management (Investopedia, 2012). Successful cash
management involves not only avoiding insolvency (and therefore bankruptcy), but also reducing
days in account receivables (AR), increasing collection rates, selecting appropriate short-term
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investment vehicles and increasing days cash on hand all in order to improve a company's overall
financial profitability (Investopedia, 2012).
Successfully managing cash is an essential skill for small business developers because
they typically have less access to affordable credit and have a significant amount of upfront costs
they need to manage while waiting for receivables (Investopedia, 2012). Wisely managing cash
enables a company to meet unexpected expenses in addition to handling regularly-occurring
events like payroll (Investopedia, 2012).

Sarbanes-Oxley Regulations
The theory underlying US securities laws is that investors are helpless without reliable
information (Volonino, 2004; Zelizer, 2002). When Enron's collapse and other corporate frauds
made it clear that "practically every element of our system of safeguards failed until it was too
late to repair the damage," Congress reinforced those laws by passing the Sarbanes-Oxley
(SARBOX) Act (Volonino, 2004; O'Malley, 2002). This new law demands that C-suite
executives confirm their confidence in the quality and integrity of information generated by
information systems by signing the figures off personally (Volonino, 2004). Under SARBOX,
the Securities and Exchange Commission holds executives accountable for reliable internal
controls, record retention, and fraud detection (Volonino, 2012).
Congress goals are to restore investor trust, stabilize markets, and plug loopholes in
existing securities laws Volonino, 2004; Zelizer, 2002). This anti-corporate crime law is
stringent, the penalties for those who break it are notably harsh, and the regulatory agencies that
it has created are powerful (Volonino, 2004).
Conclusion
The owners and members of the board of directors of XYZ Construction, Inc. are
required by law to be intricately involved in the policy-making aspects of the corporation. One
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of the main responsibilities of the owners and board is to ensure that a cutting-edge and
responsive financial and accounting system is in place. They are there to set policy, and
management is there to execute these policies. This system must be responsive to the legal and
accounting requirements mandated by political, legal, management and accounting regulatory
organizations.
The departure of the CFO has obviously left a void in the knowledge base of the
company. The owners and board should ensure that others in the organization have the requisite
knowledge and experience to readily fill any void, should one occur.
References
Cosmin, D. (2011). Enhancing assets protection through an adequate monitoring of internal
control system by internal audit. Annals of The University of Oradea, Economic Science
Series, 20(2), 491-497.
Edition, Custom (2012).SKS7000 Management VitalSource eBook for Northcentral University.
Pearson Learning Solutions. Retrieved from
VitalSource eBook: 9780558870638#outline(23.11.1).
Investopedia (2012). Cash Management. Retrieved from
http://www.investopedia.com/terms/c/cash-management.asp#axzz2EVLbQTZC
KPMG Review (1999). Internal control: A practical guide, Service Point (UK) Limited,
Retrieved from
www.ecgi.org/codes/documents/kpmg_internal_control_practical_guide.pdf
Kroeten, T. (2012). Syllabus for SKS7000-8: Doctoral Comprehensive Strategic Knowledge
Studies, 2.
OMalley, S. (2002). Statement before the senate committee on banking, housing, and urban
affairs. Accounting and Investor Protection Issues Hearing. 107th Congress. Retrieved
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from http://64.233.67.104/search?g=cache:-VICy-vOZZkJ:www.niea.org/documents/
NIEA 04 winter news.pdf+OMalley+S.+(2002)+Statement+Before+the+Senate+
Committee+on+Banking+Housing.+Housing+and+Urban+Affairs.+Accounting+
and+Investor+Proh (current Aug. 10, 2004).
TheFreeDictionary (2012). Net Working Capital. Retrieved from
http://financial-dictionary.thefreedictionary.com/Net+Working+Capital
Volonino, L. Gressner, G.H., & Kermis, G.F. (2004). Holistic compliance with sarbanesoxley.com. Communications of ATS, 2004(14), 219-233.

Zelizer, E.G. (2002). The Sarbanes-oxley act: Accounting for corporate corruption? University
of Chicago Loyola Consumer Law Review, 15(27) (15 Loy.Consumer L. Rev. 27)

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