Dragonfly Corporation Insolvency Assessment

This assignment requires an in-depth analysis of Dragonfly Corporation's financial situation, including a review of their balance sheet. The company has decided to sell out their business and pay off remaining dues to their landlord. Insolvency practitioners must consider merger or acquisition options and external factors such as cultural alignment and ethical considerations during the selling process.

FINANCIAL ACCOUNTING

EXECUTIVE SUMMARY
Financial accounting is the summarising, analysing and recording of all the financial
transactions of the business for particular period of time. This financial statements are used by
the stakeholder, suppliers, governments, banks and owners of the business to make out the
market position of firm. The report will cover Dragonfly corporation which was incorporated in
year 2009 by Janet and Michael in Crossroads Settle as teenage clothing store. Since then the
financial picture of Dragonfly was not rosy and had lost money accumulated deficit form both
stores.

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
Q1 Analysing the financial statements of the business...............................................................4
Q2 Identify key ratio and apply ratio analysis............................................................................5
Q3 Arguments of will the business be successful in future or not and what should be done to
help it succeeds...........................................................................................................................5
Q4 Considering the impact of political competitive environment on business..........................6
Q5 Discussing relevant ethical consideration while insolvency of business..............................7
Q6 Including external factors that need to be taken into consideration of merger or
acquisition...................................................................................................................................8
Q7 Recommendation of own analysis and should buy or save the business or not....................9
CONCLUSIONS..............................................................................................................................9
REFERENCES..............................................................................................................................10
INTRODUCTION

Financial accounting is that field of accounting which is majorly concern with the
summarising, analysing and reporting of the financial transactions or the flow of money in the
business. There are number of financial statements which need to be prepared like annual report,
balance sheet and cash flow etc., All these kinds of financial statements which are to be prepared
by accountant to show the financial stability of the company are mainly used by shareholders,
stakeholders, suppliers, Governments, banks and owner of business. The present report is based
on Dragonfly corporation which is a teenage clothing store in Seattle and business is not doing
good and the owners are planning to close the store.
Q1 Analysing the financial statements of the business.
Dragonfly Corporation which was incorporated in the year 2009 and since then it has
been into loss and it also accumulated the deficit from both its stores which was nearly $14000.
The net loss of the firm in the year 2010 ending was $13703 and in 2011 it was around $14000.
But the owners are believing that in the past year the business is going smoothly and the numbers
in balance sheet or income statements are not real (Weil, Schipper and Francis, 2013). But as
according to all the financial statements of Dragonfly corporation it is still showing the loss of
business since incorporation. The landlord also claimed that there are many overdue lease
payments which are still remaining and now landlord is threatening a legal action on Dragonfly.
The financial statements are generally prepared to analysis the annual report of the
business to clearly define the profit and loss. These all statements are useful for the external
users and the landlord after seeing the profits and loss statements of Dragonfly Corporation is not
happy. As landlord says that Janet and Michael have not been able to pay of the overdue rent to
landlord. At all the time whether it is 2009 or 2011 the total assets of the company are lower than
compared to total liability (Dragonfly Corporation, 2017). In the year 2009 the assets were
$87500 while the liability was around $134600 which means that it need to pay more to its
creditors including landlord. The accumulated deficit was always higher in 2009 $11100, 2010 it
was $12500 and 2011 it increased to $13900.
The lease payments was also due at both the stores Crossroads from January 2012 to
February 2013 was $45000 and that of Bellevue from the same period it was $23200 with the
total of $68000 (Waegenaere, Sansing and Wielhouwer, 2015). As according to income
statements of Dragonfly it was calculated that for both the year from the incorporation in 2009

and in 2010 the company was facing a situation of loss which was $57400 and $13700
respectively.
Balance sheet (unaudited)
Illustration 1: Balance sheet of Dragonfly Corporation
Q2 Identify key ratio and apply ratio analysis.
Ratio analysis is the form of financial statements which quickly indicate the firm's
financial performance in all the key areas. It is classified as short term, debt management, assets
management, profitability and market value ratio.
Solvency ratio- this will be the best type of ratio which will be applied to Dragonfly corporation
as this compare the level of company's debt with its assets, equity and earning. As Dragonfly is
in the path of insolvency so this ratio could be taken out to see the long term paying capacity of
firm and interest on the debt.
Profitability ratio- this ratio is taken to see how well the company is performing and how much
profits they are earning from its operation (Bushman, 2014). So for Dragonfly it would be
essential to take out the profitability of the firm so as to see the profitability of company and then
sell out it.

Q3 Arguments of will the business be successful in future or not and what should be done to help
it succeeds.
The present condition of Dragonfly corporation is not very much good as it is
incorporating the loss since 2009 and till date not been able to settle down in the business. Both
the stores at Crossroads and Bellevue are not doing good as was accepted by the owners Janet
and Michael. Till the year 2013 for which all the financial data have been provided the
accumulated deficit is increasing. All the sales in the starting year was only not very good and
the gross margin from sale was also low (Glover, 2014). Consistently this created an annual loss
of $5700 in the year 2009 and operating expenses were too much out of line. Janet and Michael
were trying to reduce the expenses of Dragonfly in 2010 and with this the sale and gross margin
both were increased. But the overdue payments of lease rent was still missing and they were not
able to arrange money for this. They also mentioned bankruptcy as the final recourse and then
wait till Christmas to came as they expected that at that time they would likely to increase sales
and gross profit margin.
And their accounts at the time of Christmas appeared to be good and situations were
somewhere good. But they still were not able to manage to give the overdue payments of their
lease to landlord and this made them to shut down the Crossroads store to make the payments. So
the final decision to close down the store after so much overdue and losses were good and clear.
There were no chances of Dragonfly to be successful in future as they have taken money both
from Janet's parents and bank. And at the end they declared themselves as insolvent and
bankrupt. It was better to shut down the stores then to continues with the losses as there were no
clear signs of them getting success over Dragonfly corporation (Brown and Jones, 2015). They
also need to pay off their taxes, rents and cost of inventory which was included in the fixed
assets of Dragonfly and total expenses reached to $118700 by the year 2012. These all were
enough to understand the number of problems Dragonfly and owners were facing since its
incorporation. So in the future time there are no chances of Dragonfly to be successful and carry
forward its business with the losses. It is better to close the store and pay off the overdue to both
bank and especially landlord.
Q4 Considering the impact of political competitive environment on business.
To carry and analysis the external factors of the business it is important for the company
to identify all the external factors. The external factors such as political, economical,

technological, legal, social and environmental are there which help the company to identify
them. Of them the major is the political factors and political competitive environment on
business. The political factor of the business will certainly be affecting the profits, loss and
competitive environment of business (Jiang, Wang and Xie, 2015). This political factor can
introduce to a risk factors and then business can suffer loss as the policy of government or whole
government of the country changes. This political pressure comes from both local and central
government of that country. This political factor will be affecting the competitive environment as
well if the policy of government are not very good for the said business then there will be very
fewer competitors in market. The main impact of the political competitive environment on
business are as follows:
Changes in regulations- this is one of the major part of any government as they are having the
power so they are required to change the regulations. These changes in regulations or policy of
government impact the country and the competitive environment of market as well. To focus on
the corporate compliance of country governments are need to introduce the regulations regarding
the compliance. The public companies were not much accountable to the social environment so
to implement this social responsibility government change the regulations.
Political stability- if any company or organisation want to operate internationally then to have a
politically stable government of that particular country is very essential. So it is required to have
a politically strong and stable government so that other corporation from around the world can
easily invest (Mayo, 2017). If the country is more stable in terms of political power than more
foreign investors will be attracted to that country and thus giving more competition to the
companies in the country
Mitigation risk- to see the impact of the political power and to lessen down the risk it is
necessary for the company to mitigate the risk. This can be done by buying the political risk
insurance. All those companies who are having their operations internationally are having more
chances of facing political instability and risk exposure. For example there are world and
economic index of freedom ranks countries this is based on how much stable the country is.
Impact on economy- this is the main impact of the political environment on the country. And
this whole impact will affect company of that economy. If the government of country is spending
more on the development of country so this will in turn stimulate economy.

Q5 Discussing relevant ethical consideration while insolvency of business
The state of being insolvent occurs when the company or corporation is not able to pay
off their dues and dues are increasing in numbers. The firm will be legally insolvent when all its
assets are less than liability than it become bankrupt and is unable to pay its dues (Baker and
Burlaud, 2015). As in the case of Dragonfly Corporation its owners are become bankrupt or
insolvent are not at all able to pay the dues either to landlord and to bank as well. Ethical
consideration is accumulation of all values and principles which will be questing between all
good and bad in human affairs. So while announcing their insolvency Dragonfly corporation
need to follow some ethics so that they can seek the financial and emotional challenge
effectively. Some of the fundamental principles of bankruptcy or insolvency are:
Integrity- this is most basic ethics of any business whether while their incorporation or wind up
or insolvency. Integrity means that they must show all their books of accounts in true sense.
There should be no hidden information while Dragonfly will be ready to announce their
insolvency they must be honest and straightforward in professional and business relationship
Objectivity- they are not allowed to have any undue influence of others while performing the
insolvency process. Insolvency practitioner are not allowed to override the professional or any
business judgements by becoming bias or any conflict of interest.
Professional competence and due care- insolvency practitioner are also need to have
professional competence and having due care while performing their duty (Warren Jr, Moffitt
and Byrnes, 2015). This practitioner must be having knowledge and skill at all level so that they
can perform their duty and service with standards.
Confidentiality- all the information which are related to the company and its books of accounts
need to be kept very confidential so that no can have access to that information. As the financial
statements of any company whether it is about to become insolvent are the matter of secret so
that no one can misuse them. The information which is used by the insolvency practitioner is
exclusivity for their use only they are not meant to show or publish or discuss about that
information to anyone else.
Professional behaviour- all the rules, regulations and laws are need to be followed by
insolvency practitioner so as to avoid any action are not discredited (Mohammed, Fahmi and

Ahmad, 2015). Insolvency practitioner should have that much courtesy and ethics while he is
performing the duty towards that insolvent firm
Q6 Including external factors that need to be taken into consideration of merger or acquisition.
If the business of Dragonfly corporation is not doing good as already seen that there are
no chance of the business of teenage clothing store to get back on track in Crossroads. So now it
would be better that either the company to close down the business the other option is of merger
or acquisition. Merger is the consolidation or joining of two or more companies together for
taking out the business forward. This can be done if both company are not doing well in the
course of their business and not earning profits but continues loss is there. Whereas, acquisition
is taking the ownership of one not so good going company by a strong company. In the process
of acquisition the whole power remains with the powerful firm and the other firm is only under
the influence of it. While, in the process of merger the power and management is with both the
firms (Akhmetshin and Osadchy, 2015). So while performing the merger or acquisition there are
some factors which need to be considered so that they can drive to success.
Strong communication this is the main factor as there must be good way of communication
between both the firms whether in merger or in acquisition. Good and strong communication will
always lead to a developed plan, sharing merger information like the merger goal will be easy.
Team integration- is also required to be there so it is easy to get the merger and acquisition
done completely and effectively. With the integration of team and their ideas it would be easy to
bring all the staff of both the company's into alignment. The key stakeholders should then be
identified so that new relationship could now be started.
Cultural alignment- surely culture of one company would be different from that of the other
and both of them would be trying to keep the policy and culture of the firm after merger or
acquisition (Brown and Jones, 2015). So for this cultural alignment it is important that the
culture of both the company are kept in mind after they are starting new business.
Value maintenance and innovation- to determine the product and service portfolio of both the
company are required. This would be required to maintain the value of brand and to promote the
innovation in the product and services.

Q7 Recommendation of own analysis and should buy or save the business or not.
Dragonfly corporation was set up in 2009 and since then it is n to able to perform good in
market and there was a continues loss of the firm. Accumulated deficit from both the store were
around $14000 as according to the balance sheet for the year 2011. So it will not be profitable to
purchase Dragonfly neither to invest in the business. There are continues losses in the business
and the dues of rent are also not paid and owners of business have also decided to announce their
insolvency. Buying decision would not at all be profitable for anyone but if the owners have
decided to pay off all the dues and loan amount then it can be better (Mayo, 2017). Only after the
payment of dues of rent and bank loan the business then can be started from the beginning and
can be purchased or invested in. It is very essential for Dragonfly corporation to pay all of the
dues.
CONCLUSIONS
Form this precise format of report on the financial statements of Dragonfly corporation
which was set up in the year 2009 and since then it was on loss only. The owners have now
decided to sell out their business as there are about $68000. They also decided to sell their stores
and to pay off remaining dues to their landlord as well. To decide from merger or acquisition and
analysing external factors from environment they need to consider those factors like cultural
alignment. The ethical consideration like objectivity and integration are need to be considered
during the selling up of the stores by insolvency practitioner.

REFERENCES
Books and journals:
Akhmetshin, E. M. and Osadchy, E. A., 2015. New requirements to the control of the
maintenance of accounting records of the company in the conditions of the economic
insecurity. International Business Management. 9(5). pp.895-902.
Baker, C. R. and Burlaud, A., 2015. The historical evolution from accounting theory to
conceptual framework in financial standards setting. The CPA Journal. 85(8). p.54.
Brown, R. and Jones, M., 2015. Mapping and exploring the topography of contemporary
financial accounting research. The British Accounting Review. 47(3). pp.237-261.
Bushman, R. M., 2014. Thoughts on financial accounting and the banking industry. Journal
of Accounting and Economics. 58(2), pp.384-395.
Glover, J., 2014. Have Academic Accountants and Financial Accounting Standard Setters
Traded Places?. Accounting, Economics and Law Account. Econ. Law. 4(1). pp.17-26.
Jiang, J., Wang, I. Y. and Xie, Y., 2015. Does it matter who serves on the Financial
Accounting Standards Board? Bob Herz’s resignation and fair value accounting for
loans. Review of Accounting Studies. 20(1). pp.371-394.
Mayo, W., 2017. GAAP: An Analytical Study of Financial Accounting Standards (Doctoral
dissertation, University of Mississippi).
Mohammed, N. F., Fahmi, F. M. and Ahmad, A. E., 2015. The Influence of AAOIFI
Accounting Standards in Reporting Islamic Financial Institutions in Malaysia. Procedia
Economics and Finance. 31. pp.418-424.
Waegenaere, A., Sansing, R. and Wielhouwer, J. L., 2015. Financial accounting effects of tax
aggressiveness: Contracting and measurement. Contemporary Accounting Research.
32(1). pp.223-242.
Warren Jr, J. D., Moffitt, K. C. and Byrnes, P., 2015. How Big Data will change accounting.
Accounting Horizons. 29(2). pp.397-407.
Weil, R. L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
concepts, methods and uses. Cengage Learning.

Online
Dragonfly Corporation, 2017 [Online] Accessed through
<http://192.168.1.18/projectfiles/internal_cust_document/CASESTUDYASSESSMENT2DRAG
ONFLYCORPORATION1510473042_1510735356.pdf>