Question

FINANCIAL STATEMENT PREPARATION - FINAL
The following events occurred at MGR Company during its first year of business:
a.	To establish the MGR, Merry and Mary each contributed a total of $50,000 in exchange for common stock.
b.	MGR, or MerryGoRound is an Event Planning Company that specializes in high-end parties. The first year they conducted 94 events and revenue for the first year amounted to $470,000, of which 95% was to be paid by the date of the event and the remainder due within 30 days of the event.
c.	Clients owe $15,000 at the end of the year from the services provided in December.
d.	At the beginning of the year, a storage building was rented. The company was required to sign a two-year lease for $15,000 per year and make a $3,000 refundable security deposit. The first year’s lease payment and the security deposit were paid at the beginning of the year.
e.	At the beginning of the year, the company purchased a full-size Merry-Go-Round at a cost of $100,000 as the signature theme piece of their company. The Merry-Go-Round is expected to be useful for fifteen years. The company paid 20% down in cash and signed a four-year note at the bank for the remainder (with 10% interest-only to be paid annually until maturity). Since each event includes the Merry-Go-Round, MGR also purchased a flatbed trailer to haul it with, for $8,000, also with an expected 15 year life. MGR must lease a large truck to haul the trailer for each event, which costs $1,000 per day.
f.	Other operating expenses, including wages, deprecation on other equipment, utilities, and rent on the storage building noted in (d) and (e) above, totaled $136,000 for the first year. No expenses were accrued or unpaid at the end of the year.
g	MGR purchased other equipment (tables & carts, ice machine, food heating trays and bags, helium tanks, music system, etc) for $10000 with an estimated life of 10 years and no salvage value. Salaries and wages for the year total $112,800 including payroll taxes.
h	The company declared and paid a $50,000 cash dividend at the end of the first year.
i	MGR is in the 35% corporate tax bracket.
Required?
	Prepare a statement of cash flows for the first year using the direct method in the Operating Activities section.
	Complete vertical analysis of the Income statement.
	Compute, explain & analyze the following ratios:
a	Gross Profit
b	Operating Leverage ratio
c	Return on common equity
d	Current ratio
e	Operating Cash flow to current liabilities
f	Long-term debt to assets
g	Interest coverage

Answer 1

Cash Flow Statements
Particulars	Amount
Cash collection from clients	$   4,55,000
Lease rent paid	$     -15,000
Salaries Paid	$ -1,12,800
Operating expenses paid	$ -1,12,800
Taxes paid	$     -74,620
Security Deposit paid	$       -3,000
Cash Flow from operation	$   1,36,780
Purchase of mary go round	$ -1,00,000
Purchase of Flated Trailer	$       -8,000
Purchase of Equipments	$     -10,000
Cash Flow From Investing	$ -1,18,000
Issue of Common Stock	$   1,00,000
Issue of 10% Bank Note	$      80,000
Interest Paid	$       -8,000
Dividend Paid	$     -50,000
Cash Flow From Financing	$   1,22,000
Net Change in cash	$   1,40,780
Opening cash	$ -
Closing cash	$   1,40,780

Income Statement
Particulars
Revenue	$   4,70,000
Other Operating Expenses	$ -1,12,800
Constribution	$   3,57,200
Lease Rent	$     -15,000
Salaries	$ -1,12,800
Depreciation	$       -8,200
Operating Profit	$   2,21,200
Interest expenses	$       -8,000
Profit Befor Tax	$   2,13,200
Tax Expenses	$     -74,620
Net Income	$   1,38,580

Compute Ratios
Gross profit	47.06%
Operating Leverage	1.61
Return on Common Equity	138.58%
Current Ratio	Can not be calculated as company does not have current Liabilities
Operatin cash flow to current liabilities	Can not be calculated as company does not have current Liabilities
Long-term debt to assets	0.73
Interest Coverage	27.65