Question

Based on the following scenario and numbers, could you create a Cash Flow Statement?

Scenario: Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors. The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Lee’s are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they don’t have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them.

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.

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 %

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.

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

Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.

Net Profit Margin

Quick Ratio

Debt-to-Equity Ratio

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.

Cost of goods sold of $35 per unit

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.

Advertising fees = $3,000

Bank fees = $200

Phone/internet = $150 per month

Shipping = $3 per unit

Utilities = $100 per month

Office Supplies = $900

Conference Exhibitor Fee = $3000

Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

Answer 1

INCOME STATEMENT
Particulars	Notes	Amount	Amount
Sales Revenue
Sales		$      33,600.00
Less: Sales Return		$                     -
Net Sales Revenue			$      33,600.00
Cost of Goods Sold			$      12,600.00
GROSS PROFIT			$      21,000.00
Operating Expenses (Income)
Advertising Fees		$        2,000.00
Bank fees		$            150.00
Phone/Internet		$        1,200.00
Shipping		$        1,260.00
Utilities		$            900.00
Office Supplies		$            800.00
Interest Exp		$            350.00
Depreciation		$            800.00
Profit on sale of equipment		$      (2,200.00)
			$        5,260.00
EARNING BEFORE TAX (EBT)			$      15,740.00
Income Tax @26%			$        4,092.40
NET INCOME			$      11,647.60

Cash Flow Statement Direct Method
PARTICULARS	Amount	Amount
Operating Activities:
Cash receipt:
Collection from debtors
Net Sales	$      33,600.00
Add: Beginning accounts receivable net of doubtful debts	$                      -
Less: Ending accounts receivables net of doubtful debts	$                      -
		$    33,600.00
Cash Payment:
Payment to suppliers
Cost of goods sold	$      12,600.00
Add: Closing inventory	$                      -
Less: Opening inventory	$      10,500.00
Add: Beginning accounts payable	$                      -
Less: Closing accounts payables	$                      -	$      2,100.00
Cash paid for operating expenses
Advertising Fees	$         2,000.00
Bank fees	$            150.00
Phone/Internet	$         1,200.00
Shipping	$         1,260.00
Utilities	$            900.00
Office Supplies	$            800.00
Interest Exp	$            350.00
		$      6,660.00
Income tax paid
Income tax expense	$         4,092.40
Add: Beginning tax payable	$                      -
Less: Closing tax payable	$                      -
		$      4,092.40
Cash flows from (Used in) Operating Activities		$    20,747.60
Investing Activities:
Sale of equipments	$         3,000.00
Purchase of equipments	$      (1,600.00)
Cash flows from (Used in) Investing Activities		$      1,400.00
Financing Activities:
Repayment of note payable		$    (5,000.00)
Cash flows from (Used in) Financing Activities		$    (5,000.00)
Net Increase/Decrease in Cash		$    17,147.60
Cash at the Beginning		$    10,000.00
Cash at the End		$    27,147.60

BALANCE SHEET
Particulars	Amount	Amount
ASSETS
Current Assets
Cash and Cash Equivalents	$      27,147.60
Accounts Receivable	$                     -
Inventory	$                     -
Short-Term Investments	$                     -
Prepaid Expenses	$                     -	$      27,147.60
Non-Current Assets
Property, Plant, and Equipment	$        5,000.00
less: Equipment sold	$        1,000.00
Add equipment purchase	$        1,600.00
less:Accumulated Depreciation	$        1,600.00	$        4,000.00
(800 + 800)
TOTAL ASSETS		$      31,147.60
Paid-up-capital
Retained earnings	$        4,500.00
Add net profit	$      11,647.60	$      16,147.60
Share holders' equity		$      15,000.00
TOTAL PAID-UP-CAPITAL		$      31,147.60
TOTAL LIABILITIES & PAID-UP-CAPITAL		$      31,147.60