Hi there. I need help with number #1. I know the answer somewhat but I am not sure how to address it in words. Back in the day, balance sheets and income statements were not required, but possibly made it harder to get investors or loans, especially since you have no numbers or reportss showing your records with cash/earnings etc.

The University of Chicago Booth School of Business Financial Accounting 30000 Financial Statement Analysis Case Groupon: Constructing Projected Financial Statements Designed by: Valeri Nikolaev Objective: Understanding the relation between financial statements and constructing a Pro-forma Balance Sheet. The following information is taken from Groupon's 2011 10-K. Some information is omitted to simplify matters; projected financial statements are hypothetical. Company overview. Groupon is a local commerce marketplace that connects merchants to consumers by offering goods and services at a discount. Traditionally, local merchants have tried to reach consumers and generate sales through a variety of methods, including the yellow pages, direct mail, newspaper, radio, television and online advertisements, promotions, and the occasional guy dancing on a street corner in a gorilla suit. By bringing the brick-and-mortar world of local commerce to the Internet, Groupon is creating a new way for local merchant partners to attract customers and sell goods and services. Dividend policy. Groupon currently does not anticipate paying dividends on common stock in the foreseeable future. Revenue recognition. The Company recognizes revenue from Groupons when the number of customers who purchase the daily deal exceeds the predetermined threshold (where applicable), the Groupon has been electronically delivered to the purchaser, and a listing of Groupons sold has been made available to the merchant. At that time, the Company's obligations to the merchant, for which it is serving as an agent, are substantially complete. The Company records the net amount it retains from the sale of Groupons after paying an agreed upon percentage (assume it is 50%) of the purchase price to the featured merchant. Gross billings. Gross billings represent the gross amounts collected from customers for Groupons sold. 50% of these amounts are paid to merchants and the remaining 50% are considered as revenue. Accounts receivable. Accounts receivable primarily represent the net cash due from the Company's credit card and other payment processors for cleared transactions. Groupon initially makes all sales on account. Merchant payments. The Company pays its merchants in installments over a period of (generally) two months for all Groupons purchased. Accrued merchant payable. Accrued merchant payable primarily consists of payment obligations to Groupon's merchant partners. Marketing expenses. Marketing expenses consist primarily of online marketing costs, such as sponsored search, advertising on social networking sites, email marketing campaigns, loyalty programs, affiliate programs, and, to a lesser extent, offline marketing costs (television, radio and print advertising). Groupon always initially pre-pays the marketing costs in advance. Selling, general and administrative (SG&A) expenses. Selling expenses reported within selling, general and administrative expense category on the consolidated statements of operations consist of payroll and sales commissions. SG&A is initially accrued and paid in subsequent months. 1 Cost of revenue. Cost of revenue is composed of direct and indirect costs incurred to generate revenue, including costs related to credit card processing fees, refunds provided to customers, which are not recoverable from the merchant, certain technology costs, editorial costs, and other processing fees. Assume that the cost of revenue does not materially differ from cash payments of the corresponding fees it can be viewed as a cash expense. Accrued expenses. The Company's accrued expenses include marketing, payroll and benefits, professional fees, and subscriber rewards and credits. Assignment summary: You are taking the role of a financial analyst whose task is to explain to an entrepreneur (investor) how to construct a projected balance sheet as well as answer some additional questions. Use the information in Groupon's (actual) balance sheet as of December 31, 2011 (Exhibit I) and the projected Income and Cash Flow Statements for the month of January (Exhibits II and III) to construct a projected Balance Sheet. Use journal entries and/or T-accounts to prepare your answer. Note that projections rely on estimates and assumptions. Please use the assumptions discussed above and (if necessary) state additional assumptions explicitly. Further, for simplicity, assume that non-operating accounts (e.g., the value of intangible assets, goodwill, etc.) remain unchanged over the period (as indicated by Exhibit I). Hence, your task is to determine the missing values on the projected balance sheet. You may use the Excel spreadsheet available on Chalk. Hints: 1. Start by making projected journal entries (T-account entries) for each item on the cash flow statement, and, subsequently, the income statement. Note that some items overlap. 2. Transfer the journal entries to T-accounts to calculate ending balances. 3. Post ending T-account balances to the projected balance sheet. Remember, the income statement accounts must be closed at the end of the period. 2 Questions: As you are working on your projections, please answer the following questions: 1. [Discussion question] Until 1987, the Statement of Cash Flows was not mandatory - companies were not required to file the Cash Flow Statement together with the Balance Sheet and Income Statement. Do you think this was an issue and why? 2. [Discussion questions] An analyst in your team proposes a strategy to construct a projected balance sheet by directly forecasting growth (changes) in balance sheet accounts. For example, he expects that receivables will grow by 5%, payables will grow by 3%, etc. Evaluate this strategy. 3. Based on the projected Cash Flow Statement, show (hypothetical) journal entries that explain the changes in the Cash Account over the period of January 2012. 4. Show (hypothetical) journal entries that explain the projected changes in the Income Statement Accounts over the period of January 2012. Note that transactions directly affecting the cash account have been already recorded above. 5. Show the closing entry and explain why we need this entry. 6. [Discussion question] What would be the maximum amount of dividends that Groupon could pay out at the end of January if they decided to do so? 7. [Discussion question] Financial flexibility of a company is characterized by its liquidity and ability to access capital markets (raise financing from outside sources, e.g. a bank). Evaluate Groupon's financial flexibility. Think of the key takeaways from the case. 3 Exhibit I GROUPON, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share amounts) Actual Projected Amounts change 31-Dec 2011 Assets Current assets: Cash and cash equivalents Accounts receivable, net Prepaid expenses and other current assets $ Total current assets Property and equipment, net Goodwill Intangible assets, net Investments in equity interests Deferred income taxes, non-current Other non-current assets 1,122,935 108,747 91,645 1,323,327 51,800 166,903 45,667 50,604 46,104 90,071 Total Assets Liabilities Current liabilities: Accounts payable Accrued merchant payable Accrued expenses Due to related parties Deferred income taxes, current $ 1,774,476 $ 40,918 520,723 212,007 246 76,841 Other current liabilities 144,427 Total current liabilities Deferred income taxes, non-current Other non-current liabilities 995,162 7,428 72,419 Total Liabilities $ Groupon, Inc. Stockholders' Equity Class A common stock, par value $0.0001 per share Additional paid-in capital Accumulated deficit (Retained Earnings) 1 Accumulated other comprehensive income Noncontrolling interests Total Equity Total Liabilities and Equity 1 1,075,009 46,104 90,071 ? 40,918 ? ? 246 ? 144,427 ? 7,428 72,419 ? 64 1,388,253 12,928 (3,074) 12,928 (3,074) ? ? 1,774,476 When retained earnings become negative, they are often called accumulated deficit. 4 ? ? ? ? 51,800 166,903 45,667 50,604 64 1,388,253 (698,704) 699,467 $ Projected Amounts Date? 2012 Exhibit II GROUPON, INC. PROJECTED STATEMENTS OF OPERATIONS (in thousands, except share and per share amounts) Projected Amount January, 2012 Revenue (gross billings of $536,810) $268,405 Costs and expenses: Cost of revenue 43,147 Marketing 128,079 Selling, general and administrative 136,834 Total operating expenses 308,060 Loss from operations (39,655) Interest and other income (expense), net 996 Loss before provision for income taxes (38,659) Provision (benefit) for income taxes 7,283 Net loss (45,942) Exhibit III GROUPON, INC. PROJECTED CASH FLOW FROM OPERATIONS (DIRECT METHOD) (in thousands, except share and per share amounts) Projected Amount January, 2012 Received from customers Paid to merchants Pre-payments of future expenses Payments toward accrued expenses Fees included in cost of revenue Interest income Payments to tax authorities 537,503 (260,362) (60,000) (106,004) (43,147) 996 (5,000) Total Cash Flow from Operations 63,986 5