Question

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. The Project: There are several financial analysis tasks involved with this project, which are outlined below (#1-8). Once you have worked through each task, you will need to produce a PowerPoint presentation to introduce and highlight your findings. Your PowerPoint presentation should include a title slide, an executive summary slide(s), subsequent slides that illustrate your findings, any additional recommendations that you would like to make, and a conclusion slide. The PowerPoint presentation should be approximately 15-25 slides in length. Include notes in the presentation as needed. You will also need to create a written executive summary (one page in length). Your final submission will include the PowerPoint presentation, the executive summary, and an Excel file with relevant calculations.

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

. 6. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be $1200 per month and utilities are estimated to cost an additional $350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is $1350 per month. However, utilities will likely only cost an additional $150 per month. They want to compare their options over one year’s time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?

7. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)

8. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit and the total contribution margin?

Answer 1

Ques. no. 1. Financial Statements

The purpose of income statement is to show how much profit or loss organisation has generated during a financial year.

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

The purpose of cash flow statement is to inform how much cash the company has received and paid with respect to its Opearing activity, Investing Activity and Financing Activity.

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

The purpose of balance sheet is to give idea of financial position of the company along with showing what company owns and what owes.

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

Ques. no. 2. Financial ratios

a.  

Net Profit Margin	Net Income	Revenue	Ratio
Net Income / Net Revenue	$ 11,647.60	$ 33,600.00	34.67%

The company is making good profit from its operations.

b.

LIQUID - ACID RATIO

Quick Assets / Quick Liabilities

In given problem, Quick Asset is Cash but there is no Quick liability at the end of financial year. Notes payable balance at the beginning of the year had been repaid during fiancial year.

c.

Debt-Equity

Debt / Equity

In given problem, at the end of the financial year, Equity is $ 31,147.60. And Debt is 0. The beginning balance of debt had been repaid during the year.
So, the ratio is 0.
The company is 100% equity funded. So, from risk perspective, the company has no debt risk factor. But the company is generating good profit margin through its operations. With a zero debt, it is actually missing oportunity of making more profit.

Question no 3. Cost Classification

A)
a. Variable
b. Fixed
c. fixed
d.fixed
e. fixed
f. variable
g. fixed
h. fixed
i. fixed
j. fixed

B)
It is important to distinguish variable cost and fixed costs as they effect the net income.
Fixed costs doesn't depennd of sales volume where as variable cost depends on production.
Fixed costs are generally can not be altered in short term. It is generally consided as an unavoidable cost.
Where as, if there is no production, then there is no Variable cost.

C)

BUDGETED INCOME STATEMENT
Particulars	Notes	Amount	Amount
Sales Revenue
Sales (600 x 85)			$      51,000.00
Less: Sales Return			$                     -
Net Sales Revenue			$      51,000.00
Cost of Goods Sold (35 x 600)			$      21,000.00
GROSS PROFIT			$      30,000.00
Operating Expenses (Income)
labour (400 x 12)		$        4,800.00
part time employee ($10 x 40 x 12)		$        4,800.00
Advertising		$        3,000.00
Bank fees		$            200.00
Phone internet (150 x 12)		$        1,800.00
Shipping ($3 x 600)		$        1,800.00
Utilities (100 x 12)		$        1,200.00
Office Supplies		$            900.00
Conference Exhibitor Fee		$        3,000.00
Travel Expenses		$        1,200.00
			$      22,700.00
OPERATING PROFIT (EBIT)			$        7,300.00
Income Tax @ 28%			$        2,044.00
NET INCOME			$        5,256.00

[question no 1, 2 & 3 answered above. For others, please repost with required question no.]