Question

1. Financial Statements: Develop an Income Statement for 20XX, Cash Flow Statement for 20XX, and Balance Sheet as of the end of 20XX based on the data provided below for year 20XX. All sales are collected when the sale is made and all expenses are paid when the expense is incurred. Explain the purpose of each financial statement. a. Income Statement Data for 20XX: • Units produced and sold = 420 • Sales ($80 per unit selling price) = $33600 • Cost of goods sold ($30 per unit, all variable costs) = $12600 • Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves) • Advertising fees =$2000 • Bank fees = $150 • Phone/internet = $1200 • Shipping ($3 per unit) = $1260 • Utilities = $900 • Office supplies = $800 • Interest expense on note payable = $350 • Depreciation expense (straight line) = $800 • Income tax rate = 26 % b. Other Financial Data for 20XX: • Proceeds from sale of equipment = $3000. The equipment originally cost $1000 and had accumulated depreciation of $200. • Purchase of equipment = $1600 (The machine is purchased on the last day of 20XX so no depreciation expense is recorded.) • Repayment of note payable = $5000 • Consider any data relevant from the income statement. c. Balance Sheet Data for Beginning of 20XX: • Cash and cash equivalents = $10000 • Accounts receivable = $0 (Cash is received at time of sale) • Raw materials inventory = $10500 • Equipment = $5000 (This includes the $1000 cost of the equipment sold in 20XX). • Accumulated depreciation = $1,000 (This includes the accumulated depreciation of 200 for the equipment sold in 20XX. • Accounts payable = $0 (Cash is paid at the time of purchase.) • Note payable = $5000 (This is the note payable which is repaid in 20XX) • Common stock = $15000 • Retained earnings = $4500 2. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results. a. Net Profit Margin b. Quick Ratio c. Debt-to-Equity Ratio 3. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost. B. Explain the importance of distinguishing between variable and fixed costs. C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information. a. Cost of goods sold of $35 per unit b. Labor = $400/month • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month. c. Advertising fees = $3,000 d. Bank fees = $200 e. Phone/internet = $150 per month f. Shipping = $3 per unit g. Utilities = $100 per month h. Office Supplies = $900 i. Conference Exhibitor Fee = $3000 j. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200 4. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is $42000. It is expected that the new piece of equipment will lead to cash flows of $17000, $29000, and $40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings. 5. Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be prepared for this. Based on the budgeted income statement calculated above for 20XY, create a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY.

I need help with the solution for part 5.

Answer 1

ANSWER :-

(1)

Income Statement for Year 20XX

Particulars	Amount
Sales	33600
Less Cost of Goods Sold	12600
Gross Profit	21000
Less Operating and Admin. Expenses
Advertising Exp	2000
Bank Fees	150
Phone/Internet	1200
Shipping	1260
Utilities	900
Office Supplies	800
Depreciation	800
Total Admin/Operating Expenses	7110
Profit Before Tax and Interest	13890
Less:
Repayment of note payable	5000
Interest on notes payable	350
Profit Before Tax	8540
Less Tax at 26%	2220
Net Profit	6320

Income Statement helps us to ascertain profit obtained in business at different levels. for example, Gross profit is derived at after deducting direct material ie purchases and direct labour from total sales.

Similarly, Net profit is derived after deducting administrative and operating expenses and interest expense and tax from gross profit as shown above.

Cash flow Statement:

Particulars	Amount
Sales (CASH)	33600
Additions
Sale of equipment(3000-800{cost-dep})	2200
Depreciation (since it is a non cash expenditure)	800
Deductions
Repayment of note payable	5000
purchase of machine	1600
Raw material (considering it to be purchased this year)	10500
Cash at the end of year	19500

A cash flow statement can be considered as the statement that shows the source and application or use of cash in business.

Balance Sheet:

Liabilities	Amount	Assets	Amount
Common Stock (Shares)	15000	Cash	10000
Notes	5000	Raw Material	10500
Retained Earnings	4500	Equipments After Depreciation	4000
Total Liabilities	24500	Total Assets	24500

(2)

(a)

A balance sheet is a statement, not an account, which shows the financial position of a business on a particular date.

Calculation of

Net Profit Margin or Net profit ratio (NP Ratio)

NP Ratio= Net Profit x 100/ Sales

=6320 x 100/ 33600

=19% approx.

Net Profit Ratio is the percentage of profit over the sales.

(b)

Quick Ratio (QR)

QR= Cash+ Receivables/ Current Liabilities

=10000/5000

=2:1

It should genearlly be greater than 1:1

(c)

Debt to Equity Ratio or D/E Ratio

DE=Debt/ Equity

=5000/15000

=0.33