Question

Q.1. A ) ALEX’s BAXTER Corporation (ABC) is in its first year of operations. Using the information below, prepare a year-end income statement and balance sheet for the business (Remember to increase/reduce equity by the amount of income/loss).

1. Through 2020, ABC purchased 5,000 bandanas at an average cost of $2 per bandana. ALEX marked-up her bandanas to 2.5 times purchase price and sold all items in the same year. On December 31st, Alex had $5,950 cash in her corporate bank account and no remaining inventory, so she ordered 2,000 bandanas at a cost of $2.10 each (they were delivered to her the same day and she paid cash).

2. Alex is paid a monthly salary of $1,000 from ABC. Also, she rents a sales booth on weekends, so she can sell bandanas in person (in addition to online). The booth costs her $500 per month.

3. At the start of the year, Alex invested $5,000 into her business (100 common shares). She also obtained a bank loan of $5,000 (ABC has only paid an annual interest of 5%). Other than the bank loan and a $4,200 accounts payable balance, ABC holds no debts.

4. At the start of the year, Alex purchased furniture for $3,000 (expected life of 15 years with no salvage value) and sewing equipment for $2,000 (expected life of 10 years with no salvage value). Both assets are depreciated using the straight-line method.

B.

b) In 2021, Alex plans to double her salary and spend $2,500 on marketing. She projects her cost to rise to $2.25 per bandana, but she expects to sell twice as many units as last year, at a price of $6 apiece. Assuming the other expenses remain constant, what does ABC’s second year look like? Write a short essay on what Alex should expect and give her appropriate business advice (You may use the projections below as part of your analysis).

Ratio	December 31, 2021 projection
Current ratio	1.50
Debt-to-Assets	0.60

Answer 1

	Ans A
	ABC
	Details for Financial statements
1	Total purchase @$2=	$                           10,000
	Sales price/unit	$                                     5
	Sales Revenue	$                           25,000
	Cash purchase of inventory	$                              4,200
	Remaining cash balance=5950-4200=	$                              1,750
2	Annual salary @1000/month	$                           12,000
	Booth Rental exp @500/month	$                              6,000
3	Equity investmnet (100 shares)	$                              5,000
	Bank Loan	$                              5,000
	Interest exp in 2020 @5%	$                                 250
	Accounts Payable balance	$                              4,200
4	Furniture cost	$                              3,000
	Salvage value	$                                    -
	Life in years	$                                   15
	Annual depreciation exp	$                                 200
	Sewing M/C cost	$                              2,000
	Salvage value	$                                    -
	Life in years	$                                   10
	Annual depreciation exp	$                                 200
	Ans B
	2021 Projection
	ABC
	Income statement for the year 2021
	Details	Amt $
	Sales Revenue	$                           60,000
	Less Operating Costs
	Purchase	$                           22,500
	Salary expense	$                           24,000
	Booth rental expense	$                              6,000
	Marketing spend	$                              2,500
	Interest expense	$                                 250
	Depreciation expense	$                                 400
	Total Operating Expense	$                           55,650
	Net Income/(Loss)	$                              4,350

ABC
Income statement for the year 2020
Details	Amt $
Sales Revenue	$                             25,000
Less Operating Costs
Purchase	$                             10,000
Salary expense	$                             12,000
Booth rental expense	$                               6,000
Interest expense	$                                  250
Depreciation expense	$                                  400
Total Operating Expense	$                             28,650
Net Income/(Loss)	$                             (3,650)

ABC
Balance Sheet as on 12/31/2020
Assets	Amt $	Liabilities & Equity	Amt$
Cash	$                               1,750	Accounts Payable	$                            4,200
Inventory	$                               4,200	Bank Loan	$                            5,000
Total Current Asset	$                               5,950	Total Current Liabilities	$                            9,200
Fixed Asset		Equity
Furniture	$                               3,000	Common share	$                            5,000
Sewing Machine	$                               2,000	Rteined Earning	$                           (3,650)
Accumulated depreciation	$                                (400)	Total Shareholder Equity	$                            1,350
Net Fixed Asset	$                               4,600
Total Asset	$                             10,550	Total Liabilities & Equity	$                          10,550

Ans B
2021 Projection
ABC
Income statement for the year 2021
Details	Amt $
Sales Revenue	$                           60,000
Less Operating Costs
Purchase	$                           22,500
Salary expense	$                           24,000
Booth rental expense	$                              6,000
Marketing spend	$                              2,500
Interest expense	$                                 250
Depreciation expense	$                                 400
Total Operating Expense	$                           55,650
Net Income/(Loss)	$                              4,350

So ABC can make profit in 2021.
However in the absence of details about Balance sheet items , the BS details cannot be completed.