Question

Bill Travis owns two Just 4 Kids stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30 miles west of Florence. Bill has been in the retail line for over 20 years, and he worked at his uncle’s hobby shop while in high school and college before starting his own store at the age of 25.

Two big secrets to a successful toy store operation are good location and product selection. Bill’s first store is located in downtown Florence. Since Bill had been born and raised in Florence, he attracted a good customer base that remained loyal to his store after some of the giant chain related toy stores began to move into the area. About 10 years ago, Bill saw the change in customer shopping habits and purchased a second store near an interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and Bill could not totally rely on the “good old boy” market alone to sustain his market share. This second store catered to the younger more mobile generation that shopped at or near malls.

Bill now was looking into other markets. Sumter was not located on the interstate, but the area was growing because of its proximity to the state capital of Columbia, which was just 30 miles to its west. Bill believed that the people of Sumter who commuted to work in Columbia would prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since Bill was a respected citizen of Florence, his reputation as an honest businessman had spread to Sumter. He believed he could quickly build up a new customer base in that location. The big chain type stores also did not seem as interested in the Sumter area, preferring instead to locate in the larger metropolitan areas of Columbia and Florence.

The appropriate toy items to feature in his stores were very important. Bill felt that his area of influence was strictly regional, and he did not have to carry much of the standard inventory of the national chain type of toy stores. His toy lines were more a reflection of local interest; thus NASCAR related items were hot sellers. Bill’s clientele also seemed interested in computer action games and a new line of Ya’ll talking dolls.

Bill went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $280,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking. Bill brought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $250,000. (Copies of the financial statements are listed at the end of the case.)

Nick Tightwad, the local bank loan vice president had been a friend of Bill’s for many years. He was a customer at Bill’s toy store on close out sales, and his bank had underwritten the funding for the second store. Nick was excited about Bill’s expansion goals and the prospect of another business loan with his friend. At the same time, Nick had to live up to his reputation. He was not about to approve a loan unless he was almost 100 percent sure that the borrower would not default. Bill’s past success had alleviated much of Nick’s concern, but he still wanted to complete a detailed analysis of the financial performance of Just 4 Kids during the last calendar year. Upon reviewing the balance sheet, Nick noticed a drop in cash during the last year even though Bill showed a strong profitable performance. The current financial statements did not seem to give enough information to answer Nick’s questions and he asked Bill to prepare a statement of cash flows for the year ending December 31, 20x7.

Just 4 Kids

Balance Sheet

December 31, 20x6

ASSETS
Cash		$ 38,500
Accounts Receivable		43,000
Inventory		126,000
Other Current Assets		17,500
Total Current Assets			$225,000
Land		$100,000
Furnishings, Fixtures & Vehicles	$150,000
Less Accumulated Depreciation	-30,000
Furnishings, Fixtures & Vehicles (net)		120,000
Building	400,000
Less Accumulated Depreciation	175,000
Building (net)		225,000
Total Long-Term Assets			445,000
Total Assets			$670,000
LIABILITIES
Accounts Payable		$ 57,500
Short-Term Notes Payable		20,000
Other Current Liabilities		13,000
Total Current Liabilities			$ 90,500
Long-Term Notes Payable			400,000
Total Liabilities			$490,500
EQUITIES
Capital		$100,000
Retained Earnings		79,500
Total Equities			$179,500
Total Liabilities and Equity			$670,000

Just 4 Kids

Income Statement

For the Year Ended December 31, 20x7

Sales Revenue		$600,000
Less Cost of Goods Sold		310,000
Gross Margin		290,000
Less Operating Expenses
Selling and Administrative	$106,200
Depreciation	20,000
Total Operating Expenses		126,200
Operating Income		163,800
Interest Expense	$50,000
Loss on Vehicle Sale	2,500
Total Other Expenses		52,500
Net Income Before Taxes		111,300
Less Income Taxes		39,300
Net Income		$72,000

Just 4 Kids

Balance Sheet

December 31, 20x7

ASSETS
Cash		$2,600
Accounts Receivable		71,000
Inventory		193,000
Other Current Assets		18,900
Total Current Assets			$285,500
Land		$100,000
Furnishings, Fixtures & Vehicles	$166,000
Less Accumulated Depreciation	-28,500
Furnishings, Fixtures & Vehicles (net)		137,500
Building	400,000
Less Accumulated Depreciation	190,000
Building (net)		210,000
Total Long-Term Assets			447,500
Total Assets			$733,000
LIABILITIES
Accounts Payable		$ 91,500
Short-Term Notes Payable		35,000
Other Current Liabilities		7,000
Total Current Liabilities			$133,500
Long-Term Notes Payable			388,000
Total Liabilities			$521,500
EQUITIES
Capital		$100,000
Retained Earnings		111,500
Total Equities			$211,500
Total Liabilities and Equity			$733,000

Required:

1. Develop a Statement of Cash Flows for Just 4 Kids for the year ending December 31, 20x7.

2. Analyze the performance of Just 4 Kids based on the financial statements.

Answer 1

Answer is given below with working

JUST4KIDS Working notes: Cash Flow Statement under Indirect method Furnishing, Fixtures & Vehicles $150,000 Depreciation $25,000 Profit and Loss A/C For the Year Ending December 31, 20X7 Cash flows from Operating Activities opening balance Bank $6,500 Amount Earnings before Interest and Taxes Add: $72,000 $2,500 $166,000 closing balance Depreciation $20,000 $2,500 $175,000 $175,000 Loss on sale of Vehicle Interest $50,000 Income taxes $39,300 Accumulated Depreciation- Furnishings, Fixtures & Vehicles $30,000 Operating profit before working Capital changes $183,800 $6,500 opening balance $28,500 P & L Fixtures and Vehicles ($28,000) $5,000 Increase in Accounts receivable closing balance Increase in inventory ($67,000) Increase in other current assets ($1,400) $34,000 $35.000 $35,000 Increase in Accounts payable Increase in short term notes payable $15,000 Retained Earnings ($6,000) ($39,300) Decrease in other current liabilities Payment of Income taxes Payment of Interest Net Cas Net cash provided by Operating Activities Cash flows from Investing Activities Purchase of Furniture (net) Net Cash provided by Investing Activities Cash flows from Financing Activities Repayment of Long term notes Dividend Paid Net Cash provided by Financing Activities Net Cash inflow/(outflow) $40,000 opening balance $111,500 P & L $79,500 Dividend paid $72,000 closing balance ($50,000) $41,100 $151,500 $151,500 ($25,000) ($25,000) ($12,000) ($40,000) ($52,000) -$35,900 $38,500 $2,600 Opening balance of cash Closing balance of cash Analysis of Performance The cash flow from operations has been positive during the year. 2 Hence it is a good sign of the operations of the firm The decrease in cash balance is mainly due to purchase of assets and payment of dividend during the year Current ratio of the firm is above 2 and Also Interest earned times ratio is above 3 So ratios are good enough to avail financial funding from bank Current Ratio $285,500 $133,500 Current Assets 2.14 Current Liabilities Interest earned times ratio $163,800 EBIT 3.28 Times $50,000 Interest Operating Profit margin $163,800 Operating profit 27.3% $600,000 Sales Net Profit Margin Net profit $72,000 12.0% $600,000 Sales