Jamie Bard is the owner Café Corner, a popular restaurant located at a busy traffic intersection in the city of Clutchmore.

For the financial year ended 30 June 2020:

• Café Corner earned a profit after income tax of $16,000. This was after taking into account sales of $821,000 and cost of sales of $623,000.

• Other operating expenses incurred to operate the business totalled $179,000. This figure included:
  1. depreciation expenses, and

2. interest expenses of $11,000 which were fully paid.

• There were some additional plant and equipment purchased for cash. However, there were no disposals of property, plant and equipment.

• The company paid $7,000 to the Tax Office in full settlement of its income tax obligations.

• The company received some interest income amounting to $4,000 when it placed some of its excess cash in an investment fund.

• The shareholders of Café Corner received dividends of $18,000 from the company.

The following are balances extracted from the Statements of Financial Position of Café Corner at the end of its most recent two financial years:

Jamie wants to understand the cash flow of Café Corner better and has asked for your assistance to help him prepare some information regarding the cash flows of the business.

Jamie Bard is the owner Café Corner, a popular restaurant located at a busy traffic intersection in the city of Clutchmore.

For the financial year ended 30 June 2020:
 Café Corner earned a profit after income tax of $16,000. This was after taking into account sales of $821,000 and cost of sales of $623,000.

 Other operating expenses incurred to operate the business totalled $179,000. This figure included:
(i) depreciation expenses, and
(ii) interest expenses of $11,000 which were fully paid.

 There were some additional plant and equipment purchased for cash. However, there were no disposals of property, plant and equipment.

 The company paid $7,000 to the Tax Office in full settlement of its income tax obligations.

 The company received some interest income amounting to $4,000 when it placed some of its excess cash in an investment fund.

 The shareholders of Café Corner received dividends of $18,000 from the company.

The following are balances extracted from the Statements of Financial Position of Café Corner at the end of its most recent two financial years:
30 June 2020 30 June 2019
$ $
Accounts payable 12,000 27,000
Accounts receivable 28,000 103,000
Accrued expenses 5,000 11,000
Accumulated depreciation 84,000 65,000
Cash 34,000 23,000
Inventory 72,000 46,000
Plant and equipment 293,000 228,000
Prepaid expenses 4,000 15,000
Share capital 180,000 160,000

Jamie wants to understand the cash flow of Café Corner better and has asked for your assistance to help him prepare some information regarding the cash flows of the business.

Required:

a) Calculate the cash receipts from customers, cash payments to suppliers and cash payments for other expenses. Show all workings. (7½ marks)

b) Using the direct method, prepare the Statement of Cash Flows for Café Corner for the financial year ended 30 June 2020. (6½ marks)

c) Prepare a reconciliation of Cash Flows from Operating Activities and Profit After Tax for Café Corner.

Answer all of these questions with the right question number next to the correct choice (letter).

Q2) When the government incurs budget deficits and there is a tight labor market (inflation):

A)It raises interest rates overall.

B)All the listed choices are correct

C)It becomes a large competitor in the market for loanable funds against corporations seeking the same funds.

D)The higher interest rates tend to choke economic growth.

Q4)Stock prices are said to provide a measure of the value of a corporation because:

A)Stock prices are rarely associated with a company's true value.

B)Markets are efficient and therefore stock prices incorporate all available information known to investors.

C)Stock prices are predetermined by the stock exchange and hence provide the best measure of a company's worth.

D)Stock prices reflect accounting book values and are therefore very accurate.

Q5)The CEO of an American car manufacturing plant buys engine parts from Japan shortly before the yen's value increases. The invoice is denominated in yens. The CEO exposed his company to:

A)Capital gains risk

B)Interest rate risk

C)Reinvestment rate risk

D)Exchange rate risk

You have the following information about a company.

·       Sales in 2019 were £2000 million. Sales are expected to grow at a rate of 15% in 2020, and afterwards the growth rate will drop to 3%.

·       EBIT margin is expected to stay constant at 15%.

·       The corporate tax rate is 40%.

·       Net working capital each year is expected to stay constant at 10% of next year's sales.

·       To generate sales growth, each year t, capital expenditure net of depreciation (i.e., Capex- Depreciation) is expected to be 1/3 of the sales increase from year t to year t+1.

·       The debt-to-equity ratio (D/E) of the company is expected to stay constant at 1/2 and its equity cost of capital is 15%.

·       The firm has perpetual bonds outstanding with a coupon rate of 9% paid annually. The bonds are currently selling at par and have a AAA credit rating.

Question: Compute the value of the company at the beginning of 2020 using the WACC method. You may assume that all cash flows occur at the end of each year.

October

1. S.Erickson invested $50,000 cash, a $16,000 pool equipment, and $12,000 of office equipment in the company.

2. The company paid $4,000 cash for five months’ rent.

3. The company purchased $1,620 of office supplies on credit from Todd’s Office Products.

5. The company paid $4,220 cash for one year’s premium on a property and liability insurance policy.

6. The company billed Deep End Co $4,800 for services performed in installing a new pool

8. The company paid $1, 620 cash for the office supplies purchased from Todd’s Office Products on October 3.

10. The company hired Julie Kruitas a part-time assistant for $136 per day, as needed.

12. The company billed Deep End Co another $1,600 for services performed.

15. The company received $4,800 cash from Deep End Co as partial payment on its account.

17. The company paid $750 cash to repair pool equipment that was damaged when moving it.

20. The company paid $1,958 cash for advertisements published in the local newspaper.

22. The company received $1,600 cash from Deep End Co. on its account.

28. The company billed Happy Summer Corp $6,802 for consulting services performed.

31. The company paid $952 cash for Julie Kruit’s wages for seven days’ work.

31. S.Erickson withdrew $3,500 cash from the company for personal use.

November

1. The Company reimbursed S. Erickson in cash for business automobile mileage allowance (Erickson logged 1,500 miles at $0.32 per mile).

2. The company received $5,630 cash from Underground Inc. for consulting services performed.

5. The company purchased office supplies for $1,325 cash from Todd’s Office Products.

8. The company billed Slides R Us $7,568 for services performed.

13. The company agreed to perform future services for Henry’s Pool and Spa Co. No work has been performed.

18. The company received $2,802 cash from Happy Summer Corp as partial payment of the October 28 bill.

22. The company donated $450 cash to the United Way in the company’s name.

24. The company completed work and sent a bill for $4,800 to Henry’s Pool and Spa Co.

25. The company sent another bill to Happy Summer Corp for the past-due amount of$4,000.

28. The company reimbursed S. Erickson in cash for business automobile mileage(1,300miles at $0.32 per mile).

30. The company paid cash to Julie Kruit for 14 days’ work.

30. S.Erickson withdrew $1,500 cash from the company for personal use.

December

2. Paid $1,200 cash to West Side Mall for Splashing Around’s share of mall advertising costs.

3. Paid $350 cash for minor repairs to the company’s pool equipment.

4. Received $ 4,800 cash from Henry’s Pool and Spa Co. for the receivable from November.

10. Paid cash to Julie Kruit for six days of work at the rate of $136 per day.

14. Notified by Henry’s Pool and Spa Co. that Splashing Around’s bid of $10,000 on a proposed project has been accepted. Henry’s paid a $6,500 cash advance to Splashing Around

15. Purchased $1,400 of office supplies on credit from Todd’sOffice Products.

16. Sent a reminder to Slides R Us to pay the fee for services recorded on November 8.

20. Completed a project for Underground Inc and received $6,545 cash.

22–26. Took the week off for the holidays.

28. Received $4,500 cash from Slides R Us on its receivable.

29. Reimbursed S.Erickson for business automobile mileage (500 miles at $0.32 per mile).31.S.Erickson withdrew $2,500 cash from the company for personal use

Prepare an income statement for the three months ended December 31, 2019

Prepare a statement of owner’s equity for the three months ended December 31, 2019

Prepare a classified balance sheet as of December 31, 2019

Record the closing entries for Splashing Around

Post the closing entries to the general ledger under "closing entry"

Prepare a post-closing trial balance as of December 31, 2019.

A US company has entered into an interest rate swap with a dealer in which the notional principal is $50 million. The company will pay a floating rate of LIBOR and receive a fixed rate of 5.75%. Interest is paid semi-annually, and the current LIBOR=5.15%. What is the total amount that the asset manager will pay to (or receive from) the dealer EVERY half of the year? Assume that every year we have 360 days, and each semi-annual payment is made on 180 days from the last payment. [Note: You should use a positive number to represents the amount the asset manager pay to the dealer. You should use a negative number represents the amount that asset manager receive from the dealer]

Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

Revenues—N Region $912,100

Revenues—S Region 1,105,800

Revenues—W Region 1,975,400

Operating Expenses—N Region 578,000

Operating Expenses—S Region 658,100

Operating Expenses—W Region 1,194,600

Corporate Expenses—Dispatching 470,400

Corporate Expenses—Equipment Management 214,500

Corporate Expenses—Treasurer’s 138,700

General Corporate Officers’ Salaries 306,300

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

North South West

Number of scheduled trains 4,900 5,900 8,800

Number of railroad cars in inventory 800 1,300 1,200

Required:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

Thomas Railroad Company

Divisional Income Statements

For the Quarter Ended December 31

North South West

Revenues $ $ $

Operating expenses Income

from operations before

service department charges $ $ $

Service department charges:

Dispatching $ $ $

Equipment Management

Total service department charges $ $ $

Income from operations $ $ $

2. What is the profit margin of each division? Round to one decimal place.

Region

Profit Margin

North Region %

South Region %

West Region %

Identify the most successful region according to the profit margin.

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

a. The method used to evaluate the performance of the divisions should be reevaluated.

b. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).

c. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).

d. None of these choices would be included.

e. All of these choices (a, b & c) would be included.

Thomas Railroad Company organizes its three divisions, the North (N), South (S), and West (W) regions, as profit centers. The chief executive officer (CEO) evaluates divisional performance, using income from operations as a percent of revenues. The following quarterly income and expense accounts were provided from the trial balance as of December 31:

The company operates three service departments: the Dispatching Department, the Equipment Management Department, and the Treasurer’s Department. The Dispatching Department manages the scheduling and releasing of completed trains. The Equipment Management Department manages the railroad cars inventories. It makes sure the right freight cars are at the right place at the right time. The Treasurer’s Department conducts a variety of services for the company as a whole. The following additional information has been gathered:

Required:

1. Prepare quarterly income statements showing income from operations for the three regions. Use three column headings: North, South, and West. Do not round your interim calculations.

2. What is the profit margin of each division? Round to one decimal place.

Identify the most successful region according to the profit margin.
North

3. What would you include in a recommendation to the CEO for a better method for evaluating the performance of the divisions?

1. The method used to evaluate the performance of the divisions should be reevaluated.
2. A better divisional performance measure would be the rate of return on investment (income from operations divided by divisional assets).
3. A better divisional performance measure would be the residual income (income from operations less a minimal return on divisional assets).
4. None of these choices would be included.
5. All of these choices (a, b & c) would be included.

You are the CEO of Broadway Medical Center.  Mrs. Sarah Jones is admitted to your hospital preparing to give birth and in a great deal of pain. According to her medical records, her unborn child is suffering from a heart defect and must be operated on quickly to save the life of the child. The surgery that must be done is expensive and can only be performed by a pediatric cardiologist, fetal surgeon, and their medical teams. Mrs. Jones insurance will not pay for the care, and is currently in a legal battle over Mrs. Jones insurance status.  This surgery is extremely dangerous, risky, and will cost the hospital millions in the short term.  The fact is that there is only a 50% chance that the procedure will work.

Knowing all of this, how do you treat Mrs. Jones situation?

What are the legal and ethical issues?

How do you deal with the insurance company and reimbursement?

Can you put any pressure on the insurance company?