Bill Travis owns two Just 4 Kids stores in Florence, SouthCarolina. He believes that the stores have been successful and hewants to open a new store in Sumter about 30 miles west ofFlorence. Bill has been in the retail line for over 20 years, andhe worked at his uncleâs hobby shop while in high school andcollege before starting his own store at the age of 25.
Two big secrets to a successful toy store operation are goodlocation and product selection. Billâs first store is located indowntown Florence. Since Bill had been born and raised in Florence,he attracted a good customer base that remained loyal to his storeafter some of the giant chain related toy stores began to move intothe area. About 10 years ago, Bill saw the change in customershopping habits and purchased a second store near an interchange toInterstate 95 in a rapidly growing retail area. Lots of newfamilies had moved into the area, and Bill could not totally relyon the âgood old boyâ market alone to sustain his market share.This second store catered to the younger more mobile generationthat shopped at or near malls.
Bill now was looking into other markets. Sumter was not locatedon the interstate, but the area was growing because of itsproximity to the state capital of Columbia, which was just 30 milesto its west. Bill believed that the people of Sumter who commutedto work in Columbia would prefer to limit their driving forshopping activities to the immediate Sumter area. Also, since Billwas a respected citizen of Florence, his reputation as an honestbusinessman had spread to Sumter. He believed he could quicklybuild up a new customer base in that location. The big chain typestores also did not seem as interested in the Sumter area,preferring instead to locate in the larger metropolitan areas ofColumbia and Florence.
The appropriate toy items to feature in his stores were veryimportant. Bill felt that his area of influence was strictlyregional, and he did not have to carry much of the standardinventory of the national chain type of toy stores. His toy lineswere more a reflection of local interest; thus NASCAR related itemswere hot sellers. Billâs clientele also seemed interested incomputer action games and a new line of Yaâll talking dolls.
Bill went to the Florence National Bank to inquire about fundingfor the new store location. He had found an abandoned furniturestore in downtown Sumter along Main Street that was up for sale for$280,000. The store seemed to be the right size and at a goodlocation. A grocery store was in the same block with ample offstreet parking. Bill brought his balance sheet for the last twoyears and an income statement for the last operating year to thebank to support his request for a retail loan of $250,000. (Copiesof the financial statements are listed at the end of the case.)
Nick Tightwad, the local bank loan vice president had been afriend of Billâs for many years. He was a customer at Billâs toystore on close out sales, and his bank had underwritten the fundingfor the second store. Nick was excited about Billâs expansion goalsand the prospect of another business loan with his friend. At thesame time, Nick had to live up to his reputation. He was not aboutto approve a loan unless he was almost 100 percent sure that theborrower would not default. Billâs past success had alleviated muchof Nickâs concern, but he still wanted to complete a detailedanalysis of the financial performance of Just 4 Kids during thelast calendar year. Upon reviewing the balance sheet, Nick noticeda drop in cash during the last year even though Bill showed astrong profitable performance. The current financial statements didnot seem to give enough information to answer Nickâs questions andhe asked Bill to prepare a statement of cash flows for the yearending December 31, 20x7.
Just 4 Kids
Balance Sheet
December 31, 20x6
ASSETS | | | |
Cash | | $ 38,500 | |
Accounts Receivable | | 43,000 | |
Inventory | | 126,000 | |
Other Current Assets | | 17,500 | |
Total Current Assets | | | $225,000 |
Land | | $100,000 | |
Furnishings, Fixtures & Vehicles | $150,000 | | |
Less Accumulated Depreciation | -30,000 | | |
Furnishings, Fixtures & Vehicles (net) | | 120,000 | |
Building | 400,000 | | |
Less Accumulated Depreciation | 175,000 | | |
Building (net) | | 225,000 | |
Total Long-Term Assets | | | 445,000 |
Total Assets | | | $670,000 |
| | | |
LIABILITIES | | | |
Accounts Payable | | $ 57,500 | |
Short-Term Notes Payable | | 20,000 | |
Other Current Liabilities | | 13,000 | |
Total Current Liabilities | | | $ 90,500 |
Long-Term Notes Payable | | | 400,000 |
Total Liabilities | | | $490,500 |
EQUITIES | | | |
Capital | | $100,000 | |
Retained Earnings | | 79,500 | |
Total Equities | | | $179,500 |
Total Liabilities and Equity | | | $670,000 |
Just 4 Kids
Income Statement
For the Year Ended December 31, 20x7
Sales Revenue | | $600,000 |
Less Cost of Goods Sold | | 310,000 |
Gross Margin | | 290,000 |
Less Operating Expenses | | |
Selling and Administrative | $106,200 | |
Depreciation | 20,000 | |
Total Operating Expenses | | 126,200 |
Operating Income | | 163,800 |
Interest Expense | $50,000 | |
Loss on Vehicle Sale | 2,500 | |
Total Other Expenses | | 52,500 |
Net Income Before Taxes | | 111,300 |
Less Income Taxes | | 39,300 |
Net Income | | $72,000 |
Just 4 Kids
Balance Sheet
December 31, 20x7
ASSETS | | | |
Cash | | $2,600 | |
Accounts Receivable | | 71,000 | |
Inventory | | 193,000 | |
Other Current Assets | | 18,900 | |
Total Current Assets | | | $285,500 |
Land | | $100,000 | |
Furnishings, Fixtures & Vehicles | $166,000 | | |
Less Accumulated Depreciation | -28,500 | | |
Furnishings, Fixtures & Vehicles (net) | | 137,500 | |
Building | 400,000 | | |
Less Accumulated Depreciation | 190,000 | | |
Building (net) | | 210,000 | |
Total Long-Term Assets | | | 447,500 |
Total Assets | | | $733,000 |
| | | |
LIABILITIES | | | |
Accounts Payable | | $ 91,500 | |
Short-Term Notes Payable | | 35,000 | |
Other Current Liabilities | | 7,000 | |
Total Current Liabilities | | | $133,500 |
Long-Term Notes Payable | | | 388,000 |
Total Liabilities | | | $521,500 |
EQUITIES | | | |
Capital | | $100,000 | |
Retained Earnings | | 111,500 | |
Total Equities | | | $211,500 |
Total Liabilities and Equity | | | $733,000 |
Required:
1. Develop a Statement of Cash Flowsfor Just 4 Kids for the year ending December 31, 20x7.
2. Analyze the performance of Just 4Kids based on the financial statements.
3. If you were Bill, how would you explain the issues, whichcould be brought up from the analysis completed in parts 1 &2?
4. If you were Nick, would you approve the loan for Bill? Why orwhy not?
