Quiz 3 has Two parts-Statement of Cash Flows and Contribution Margin
Part 1 Statement of Cash Flows
Gary and Margaret Queen owns two Queens Jewelry Products stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30 miles west of Florence. Gary has been in the retail line for over 20 years, and he worked at his uncle’s ho
y shop while in high school and college before starting his own store at the age of 25. Margaret used to be a legal assistant at a local law office before quitting to help her husband run the jewelry store.
Two big secrets to a successful jewelry store operation are good location and product selection. Gary’s first store is located in downtown Florence. Since Gary had been born and raised in Florence, he attracted a good customer base that remained loyal to his store after some of the giant chain related jewelry stores began to move into the area. About 10 years ago, Gary saw the change in customer shopping habits and purchased a second store near an interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and Gary could not totally rely on the “good old boy” market alone to sustain his market share. This second store catered to the younger more mobile generation that shopped at or near malls.
Gary now was looking into other markets. Sumter was not located on the interstate, but the area was growing because of its proximity to the state capital of Columbia, which was just 30 miles to its west. Gary believed that the people of Sumter who commuted to work in Columbia would prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since Gary was a respected citizen of Florence, his reputation as an honest businessman had spread to Sumter. He believed he could quickly build up a new customer base in that location. The big chain type stores also did not seem as interested in the Sumter area, prefe
ing instead to locate in the larger metropolitan areas of Columbia and Florence. The appropriate jewelry items to feature in his stores were very important. Gary felt that his area of influence was strictly regional, and he did not have to ca
y much of the standard inventory of the national chain type of jewelry stores. His jewelry was more a reflection of local interest; thus a lot of his wedding ring sets and related items were hot sellers.
Gary went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $350,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking. He
ought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $350,000. (Copies of the financial statements are listed at the end of the quiz).
Michael Tightwad, the local bank loan vice president had been a friend of Gary’s for many years. He was a customer at Gary’s jewelry store and purchased his wedding ring set from Gary’s store, and his bank had underwritten the funding for the second store. Michael was excited about Gary’s expansion goals and the prospect of another business loan with his friend. At the same time, Michael had to live up to his reputation and because of interest rates being what they are, he had to be very critical of any loan coming across his desk. He was not about to approve a loan unless he was almost 100 percent sure that the bo
ower would not default. Gary’s past success had alleviated much of Michael’s concern, but he still wanted to complete a detailed analysis of the financial performance of Queens Jewelry Products during the last calendar year. Upon reviewing the balance sheet, Michael knew with the covid pandemic last year, foot traffic was reduced at many retail stores, but Queens Jewelry Products showed a strong profitable performance. The cu
ent financial statements did not seem to give enough information to answer Michael’s questions and he asked Gary to prepare a statement of cash flows for the year ending December 31, 20xx. Gary has come to you for some help with this loan.
Additional transaction data
A. Purchased $310,000 in plant assets by paying cash.
B. Sold plant assets with a cost of $55,000 and accumulated depreciation of $15,000, yielding a gain of $10,000.
C. Received $90,000 cash from issuance of notes payable.
D. Paid $10,000 cash to retire notes payable.
E. Received $120,000 cash from issuing shares of common stock.
F. Paid $20,000 cash for purchase of shares of treasury stock.
Required:
1. Develop a Statement of Cash Flows for Queens Jewelry Products for the 2nd year ending December 31, 20xx.
2. Analyze the financial performance of Queens Jewelry Products based on ALL the financial statements (using ratios and cash flows.)
3. If you were Gary Queen, how would you explain to Michael Tightwad the financial situation to help justify the loan request? (Not just yes or no question, please ratios and cash flows to support your answer!)
4. If you were Michael Tightwad, would you approve the loan for Queens Jewelry? Why or why not? (Not just yes or no question, please ratios and cash flows to support your answer)
Queens Jewelry Products info for the last two years Balance sheets
Balance Sheet
Year 2
Year 1
Assets
Cu
ent Assets
Cash
$ 22,000
$ 42,000
Accounts receivable
90,000
73,000
Inventory
143,000
145,000
Long term assets
Plant Assets
507,000
252,000
Accumulated Dep. Plant assets
(47,000)
(42,000)
Total Assets
$ 715,000
$470,000
Liabilities
Cu
ent Liabilities
Accounts Payable
90,000
50,000
Accrued Liabilities
5,000
10,000
Long-term liabilities
Notes Payable
160,000
80,000
Total Liabilities
$255,000
$140,000
Stockholders’ Equity
Common Stock no pa
370,000
250,000
Retained Earnings
110,000
80,000
Treasury Stock
(20,000)
XXXXXXXXXX
Total Stockholders’ Equity
460,000
330,000
Total Liab. And Stockholders Equity
$ 715,000
$470,000
Queen Jewelry Products Income Statement last year
Income Statement Year 2
Sales Revenue
$ 286,000
Costs of Goods Sold
XXXXXXXXXX,000
Gross Profit
XXXXXXXXXX,000
Operating Expenses
Salaries and Wages Expense
$56,000
Depreciation Expense-Plant Assets
20,000
Advertising Expense
16,000
Total Operating Expenses
XXXXXXXXXX,000
Operating Income
XXXXXXXXXX,000
Other Revenue and Expenses
Interest Revenue
XXXXXXXXXX,000
Dividend Revenue
XXXXXXXXXX,000
Gain on Sale of Plant Assets
XXXXXXXXXX,000
Interest expense
XXXXXXXXXX,000)
Total other Rev and Exp.
XXXXXXXXXX,000
Net Income Before Taxes
XXXXXXXXXX,000
Income Tax Expense
XXXXXXXXXX,000
Net Income
XXXXXXXXXX,000
Part Two Contribution Margin
Calvin and Susan Sherman set up a company called Heavenly Music Incorporated. They provide music equipment like drums around the Washington, D.C. area for various musical artist and aspiring musical artists. The drum sets sell 1,000 for $500 each for the year ended December 31. The tax rate is 21%.
Variable production costs
Plastic for casing - $17,000
Wage of assembly workers - $82,000
Drum stands - $26,000
Selling and Administrative-$15,000
Fixed manufacturing costs
Taxes on factory - $5,000
Factory maintenance - $10,000
Factory machine depreciation - $40,000
Fixed selling and administrative costs
Lease of equipment for sales staff - $10,000
Accounting staff salaries - $35,000
Administrative management salaries - $125,000
Required: Please complete the following:
1. Compute the contribution margin.
2. Compute the contribution margin ratio.
3. Compute the
eak-even in sales units.
4. Compute the
eak-even in sales dollars.
5. Compute the margin of safety in units.
6. Prepare a contribution income statement for the year end.
7. Compute the unit sales required for a monthly after-tax profit of $50,000.