ACCTG 2600 Lecture Notes - Lecture 1: Income Statement, Profit Maximization

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9 Jan 2017

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How much things cost, and how you can use that to make business decisions. Statement of operations: income statement: tells you what happened during a period of time. Cost of sales: the cost it takes to make what they sell. Balance sheet: tells you how much cash you have right now. Short term marketable securities: cds and bonds that expire within 6 months. Investors, creditors, customers, suppliers, government agencies, and labor unions. Investment decisions, stewardship evaluation, monitoring activity, and regulatory measures. Tells a person whether they want to invest in the company. Produces information for internal users, such as managers, executives, and workers. Identifies, collects, measures, classifies, and reports financial and nonfinancial information to internal users in planning, controlling, and decision making. The objective of profit maximization should be constrained by the requirement that profits be achieved through legal and ethical means. Ethical behavior involves choosing actions that are right, proper, and just.

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For this assignment you will create a financial business plan thatwill tie together an income statement, a purchases budget, a cashbudget, and a pro forma balance sheet. The completed assignmentshould be printed on two pages. You must also turn in a âhardâ copyof your report.

The first step is to produce the income statement.

Income Statement
To complete this first step, we need to project monthly sales andexpenses. This requires estimates of monthly sales volume, sellingprice, and cost behaviors. The following are the estimates youshould use in developing your model.

Annual sales: 18,000 pizzas

Monthly sales pattern:

January 8% April 10.5% July 4% October 10.5%
February 10% May 7% August 6% November 9%
March 11% June 6% September 9.5% December 8.5%

Selling Price: $11.50 per pizza

Annual cost behaviors:
Fixed Variable (per pizza)
Ingredients $ 0 $3.00
Salaries & wages 48,000 .50
Advertising 3,000 .00
Depreciation 9,000 .00
Utilities 3,000 .25
Supplies 0 .15
Local taxes 4,200 .00
Insurance 2,400 .00
Miscellaneous 2,400 .10

The above fixed expenses are for the entire year. Assume fixedexpenses are incurred evenly throughout the year.

Your assignment is to produce a computer spreadsheet that willgenerate monthly income statements for the entire year. Thespreadsheet should allow for easy manipulation of annual volume,selling price, and changes in cost behavior.

Purchases budget, balance sheet, and cash budget
After completing the projected income statement, you are now ableto prepare the purchases budget, cash budget, and balance sheet.The purchasing budget is used to plan raw material (ingredient)purchases. The purpose of the cash budget is to predict our cashposition at the end of each period, thus allowing us to planshort-term borrowing if it is needed. We create the cash budget bydetermining the amount and timing of cash receipts and cashpayments. To do this, we make certain assumptions about expectedcash flow patterns. The following assumptions apply to the PizzaShoppe:

1. Revenues are collected in the month of sale.
2. Ingredients purchased are paid as follows:
â¢ Forty percent in the month of purchase.
â¢ Sixty percent in the month following the purchase.
3. Our policy is to have enough ingredients on hand at the end ofeach month to satisfy 20% of the next monthâs cost ofingredients.
4. Salaries and wages are paid as follows:
â¢ Seventy-five percent in the month incurred.
â¢ Twenty-five percent in the following month.
5. Advertising is paid in the month incurred.
6. Utilities are paid in the month after itâs incurred.
7. Supplies are purchased and paid in the month before use.
8. Insurance is paid 50% in January and 50% in July.
9. The local taxes are paid 50% in April and 50% in October.
10. All miscellaneous expenses are paid in the month after they areincurred.
11. The long-term loan carries a 12% interest rate.
12. The owner withdraws $3,000 per month.

In addition to the amount and timing of cash flows, we need to knowwhat our initial financial position is. Financial position iscaptured by the balance sheet. The balance sheet is a listing ofour resources (assets), our obligations (liabilities), and the networth of the business (ownerâs equity). The balance sheet for thePizza Shoppe on January 1, just after we purchase it, is asfollows:

ASSETS LIABILITIES
Cash $ 100 Accounts Payable $ 0
Ingredients inventory 700 Salaries & Wages Payable 0
Supplies inventory 216 Utilities payable 500
Prepaid taxes 0 Taxes payable 0
Prepaid insurance 0 Misc. expenses payable 0
Equipment & fixtures 30,000 Short-term bank loan 0
Less: Accumulated deprec. 0 Long-term bank loan 90,000
Building 60,000 Total Liabilities $ 90,500
Less: Accumulated deprec. 0
Land 29,500 OWNERS EQUITY $ 30,016
Total Assets $120,516
TOTAL LIABILITIES & O.E. $120,516

ceruleanpug675

Glow, Inc. is interested in purchasing some new manufacturingequipment right after the beginning of the new year. They wouldlike to finance the new equipment with cash and marketablesecurities, but if necessary they can get a short-term loan from alocal bank. You have been engaged to prepare a master budget forGlow, Inc. for the first quarter of 2016. Glow, Inc. is a small,rapidly growing manufacturer of lighting equipment. The companyâsmain product line is table lamps. The marketing manager hasrecently completed a sales forecast. She believes the companyâssales during the first quarter of 2016 will increase by 15 percenteach month over the previous monthâs sales. Then sales are expectedto remain constant for several months. Glow Inc.âs projectedbalance sheet as of December 31, 2015 is as follows:

Cash $60,000

Accountsreceivable 312,000

Marketablesecurities 30,000

Inventory 261,625

Buildings and equipment (net of accumulateddepreciation) 1,298,519

Total assets $1,962,144

Accounts payable $366,844

Bond interestpayable 12,500

Property taxespayable 4,800

Bonds payable (10%; due in2020) 600,000

Common stock 750,000

Retainedearnings 228,000

Total liabilities and stockholders' equity $1,962,144

The controller is now preparing a budget for the first quarterof 2016. In the process, the following information has beenaccumulated:

1) Projected sales for December 2015 are $650,000. Credit salesare typically 60% of total sales. Glow, Inc.âs credit experienceindicates that 20% of credit sales are collected during the monthof sale, and the remainder are collected during the followingmonth.

2) Glow, Inc.âs cost of goods sold generally runs at 70% ofsales. Inventory is purchased on account and 25% of each monthâspurchases are paid during the month of purchase. The remainder ispaid during the following month. In order to have adequate stocksof inventory on hand, the company attempts to have inventory onhand at the end of each month equal to half of the next monthâsprojected cost of goods sold.

3) The controller has estimated that Glow Inc.âs other monthlyexpenses will be as follows:

Sales salaries $20,000

Advertising andpromotion 25,000

Administrativesalaries 35,000

Depreciation 15,000

Interest onbonds 2,500

Propertytaxes 1,200

In addition, sales commissions run at the rate of 3 percent ofsales and are paid in the same month as the sale.

4) The company president has indicated that the company shouldinvest $275,000 in state of the art manufacturing equipment justafter the new year begins. This equipment purchase will be financedprimarily from the companyâs cash and marketable securities.However, the president believes the company needs to keep a minimumcash balance of $50,000. If necessary, the remainder of theequipment purchase will be financed using short-term credit from alocal bank. The minimum period for such a loan is three months. Thecurrent short-term interest rates are 8 percent per year and areexpected to remain at this rate through the time the equipment ispurchased. If a loan is necessary, the president has decided itshould be paid off by the end of the first quarter if possible.

5) Glow, Inc.âs board of directors has indicated an intention todeclare and pay dividends of $100,000 on the last day of eachquarter.

6) The interest on any short-term borrowing will be paid whenthe loan is repaid. Interest on Glow, Inc.âs bonds is paidsemiannually on January 31 and July 31 for the preceding six-monthperiod.

7) Property taxes are paid semiannually on February 28 andAugust 31 for the preceding six-month period.

Required: Prepare Glow, Inc.âs master budget for thefirst quarter of 2016 by completing the following schedules andstatements. Round all answers to the nearest dollar (do not includecents).

6.) Analysis of short-term financing needs:

Projected cash balance as of December 31, 2015

Less: minimum cash balance

Cash available for equipment purchases

Projected proceeds from sale of marketable securities

Cash available

Less: Cost of investment in equipment

Required short-term borrowing

7) Prepare Glow, Inc.âs budgeted income statement for the firstquarter of 2016. (Ignore income taxes.)

8) Prepare Glow, Inc.âs budgeted statement of retained earningsfor the first quarter of 2016.

9) EXTRA CREDIT (5 points): Prepare Glow, Inc.âs budgetedbalance sheet as of March 31, 2016. (Hint: On March 31, 2016, BondInterest Payable is $5,000 and Property Taxes Payable is$1,200.)

coffeereindeer907

Golden, Inc. is interested in purchasing some new manufacturingequipment right after the beginning of the new year. They wouldlike to finance the new equipment with cash and marketablesecurities, but if necessary they can get a short-term loan from alocal bank. You have been engaged to prepare a master budget forGolden, Inc. for the first quarter of 2016. Golden, Inc. is asmall, rapidly growing manufacturer of lighting equipment. Thecompanyâs main product line is table lamps. The marketing managerhas recently completed a sales forecast. She believes the companyâssales during the first quarter of 2016 will increase by 15 percenteach month over the previous monthâs sales. Then sales are expectedto remain constant for several months. Golden Inc.âs projectedbalance sheet as of December 31, 2015 is as follows:

Cash $ 60,000

Accounts receivable 312,000

Marketable securities 30,000

Inventory 261,625

Buildings and equipment (net of accumulated depreciation)1,298,519

Total assets $ 1,962,144

Accounts payable $ 366,844

Bond interest payable 12,500

Property taxes payable 4,800

Bonds payable (10%; due in 2020) 600,000

Common stock 750,000

Retained earnings 228,000

Total liabilities and stockholders' equity $ 1,962,144

The controller is now preparing a budget for the first quarterof 2016. In the process, the following information has beenaccumulated:

1) Projected sales for December 2015 are $650,000. Credit salesare typically 60% of total sales. Golden, Inc.âs credit experienceindicates that 20% of credit sales are collected during the monthof sale, and the remainder are collected during the followingmonth.

2) Golden, Inc.âs cost of goods sold generally runs at 70% ofsales. Inventory is purchased on account and 25% of each monthâspurchases are paid during the month of purchase. The remainder ispaid during the following month. In order to have adequate stocksof inventory on hand, the company attempts to have inventory onhand at the end of each month equal to half of the next monthâsprojected cost of goods sold.

3) The controller has estimated that Golden Inc.âs other monthlyexpenses will be as follows:

Sales salaries $ 20,000

Advertising and promotion 25,000

Administrative salaries 35,000

Depreciation 15,000

Interest on bonds 2,500

Property taxes 1,200

In addition, sales commissions run at the rate of 3 percent ofsales and are paid in the same month as the sale.

5) Golden, Inc.âs board of directors has indicated an intentionto declare and pay dividends of $100,000 on the last day of eachquarter.

6) The interest on any short-term borrowing will be paid whenthe loan is repaid. Interest on Golden, Inc.âs bonds is paidsemiannually on January 31 and July 31 for the preceding six-monthperiod.

7) Property taxes are paid semiannually on February 28 andAugust 31 for the preceding six-month period.

Required: Round all answers to the nearest dollar (donot include cents).

1) Prepare Golden, Inc.âs budgeted income statement for thefirst quarter of 2016. (Ignore income taxes.)

2) Prepare Golden, Inc.âs budgeted statement of retainedearnings for the first quarter of 2016.

3) Prepare Golden, Inc.âs budgeted balance sheet as of March 31,2016. (Hint: On March 31, 2016, Bond Interest Payable is $5,000 andProperty Taxes Payable is

$1,200.)

Please show your complete calculation to understand theconcept.

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ACCTG 2600 Lecture Notes - Lecture 1: Income Statement, Profit Maximization

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