FMGT 1116 Lecture Notes - Unpaid Work
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Title: Business Structure, Liability, and Partnership Agreement Develop a hypothetical business you would consider starting with a friend or relative.Imagine that the friend or relative has sufficient funds to start the business and that you will be doing most of the work (for example, if you were starting a mobile car wash business, you would be procuring the customers and washing the cars). Imagine also that you will be performing all the bookkeeping functions for the business. In a written report, prepare the following:A report to your partner, containing a detailed description of the differences regarding liability with respect to a sole proprietorship, a general partnership, a limited partnership, and a corporation. A completed partnership agreement, including the following elements ready for signatures using the partnership agreement included. |
Example of Partnership Agreement
Detailed description of the business Names of the partners Address of the partnership and the partners Roles of each of the partners as limited partners, being as complete and detailed as possible (you can also be as imaginative as you need to be with titles and responsibilities ) List of assets provided by each partner Division of income Division of partnership liabilities (debts) Method by which the partnership may be dissolved, including what happens in the event of filing for bankruptcy |
(NAME), and (NAME), the below signed hereby enter into this Partnership Agreement on behalf of themselves, their heirs, successors and assigns, and set forth following terms and conditions as constituting the Partnership Agreement in its entirety:
1. The partnership shall go by the following name: (NAME).
2. The partnership's principle place of business shall be (DESCRIBE).
3. The first day that the partnership shall begin business is: (DATE) and it will continue until the partners agree to terminate it or until forced to cease its operations by law.
4. The partnership's operations shall be primarily in the following field or area: (DESCRIBE)
5. The partnership shall be capitalized as follows: For each $ (AMOUNT) (dollars) each partner shall receive (#) shares with contribution being made as follows:
Partner A contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. Partner B contributes $(AMOUNT) and shall receive (#) shares, the same being (#) % of the total shares available. 6. Losses and gains on contributed capital and other property shall be assigned as follows: (DESCRIBE)
The IRS's general allocation rule shall apply, and gains and losses shall be allocated according to the % of total capital contributed by each partner as set out in paragraph 5 above.
7. Profits and losses shall be allocated according to the same percentage allocation set forth in paragraph #6 above. 8. Salary, if any, for the services rendered shall be determined by unanimous approval of the partners.
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Project Partnership Agreement
PARTNERSHIP AGREEMENT
10. Each partner shall maintain both an individual drawing account and an individual capital account. Into the capital account shall be placed that partner's initial capitalization and any increases thereto. The drawing accounts shall be used for withdrawal of amounts, the size of which is limited to $(AMOUNT) on any one day.
11. Adequate accounting records shall be made and maintained. Any partner or his/her agent may review any and all accounting or other records at anytime.
12. The partners designate the following as the Partnership's business and checking accounts into which all the funds of the Partnership shall be placed and maintained: (DESCRIBE)
13. Accounting records and books shall be kept on a (select one) 1. cash basis 2. accrual basis and the fiscal year shall begin on the (#) day of (MONTH) and shall end (#) day of (MONTH).
14. At the close of the fiscal year, there shall be an annual audit conducted by the following accounting firm: (DESCRIBE)
15. The partnership shall dissolve upon the retirement, death, or incapacity of any partner unless the remaining partner elects the option of buying out that partner's share. (DESCRIBE THE DETAILS)
16. Upon termination or dissolution of the Partnership, the Partnership will be promptly liquidated, with all debts being paid first, prior to any distribution of the remaining funds. Distribution shall be made according to the percentage of ownership as set out in paragraph #5 above.
17. Any controversy or claim arising out of or relating to this Agreement, or the breach thereof, shall be settled by arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association, and judgment upon the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof.
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Project Partnership Agreement
9. Control and management of the partnership shall be split equally amongst the partners.
So agreed, this (#) day of (MONTH), 20 .
________________________ (NAME) ________________________ (NAME)
Review - make sure the following items are included in this agreement!
Detailed description of the business
Names of the partners
Address of the partnership and the partners
Roles of each of the partners—be as complete and detailed as possible
List of assets provided by each partner
Division of income
Division of partnership liabilities (debts)
Method by which the partnership may be dissolved
(If possible can you please complete in an excel document)
Excel Project Instructions
Assume ABC Company has asked you to not only prepare their 2015 year-end Balance Sheet but to also provide pro-forma financial statements for 2016. In addition, they have asked you to evaluate their company based on the pro-forma statements with regard to ratios. They also want you to evaluate 3 projects they are considering. Their information is as follows:
End of the year information:
Account | 12/31/15 Ending Balance |
Cash | 50,000 |
Accounts Receivable | 175,000 |
Inventory | 126,00 |
Equipment | 480,000 |
Accumulated Depreciation | 90,000 |
Accounts Payable | 156,000 |
Short-term Notes Payable | 12,000 |
Long-term Notes Payable | 200,000 |
Common Stock | 235,000 |
Retained Earnings | solve |
Additional Information:
Sales for December total 10,000 units. Each month’s sales are expected to exceed the prior month’s results by 5%. The product’s selling price is $25 per unit.
Company policy calls for a given month’s ending inventory to equal 80% of the next month’s expected unit sales. The December 31 2015 inventory is 8,400 units, which complies with the policy. The purchase price is $15 per unit.
Sales representatives’ commissions are 12.5% of sales and are paid in the month of the sales. The sales manager’s monthly salary will be $3,500 in January and $4,000 per month thereafter.
Monthly general and administrative expenses include $8,000 administrative salaries, $5,000 depreciation, and 0.9% monthly interest on the long-term note payable.
The company expects 30% of sales to be for cash and the remaining 70% on credit. Receivables are collected in full in the month following the sale (none is collected in the month of sale).
All merchandise purchases are on credit, and no payables arise from any other transactions. One month’s purchases are fully paid in the next month.
The minimum ending cash balance for all months is $50,000. If necessary, the company borrows enough cash using a short-term note to reach the minimum. Short-term notes require an interest payment of 1% at each month-end (before any repayment). If the ending cash balance exceeds the minimum, the excess will be applied to repaying the short-term notes payable balance.
Dividends of $100,000 are to be declared and paid in February.
No cash payments for income taxes are to be made during the first calendar quarter. Income taxes will be assessed at 35% in the quarter.
Equipment purchases of $55,000 are scheduled for March.
ABC Company’s management is also considering 3 new projects consisting of the purchase of new equipment. The company has limited resources, and may not be able to complete make all 3 purchases. The information is as follows for the purchases below.
Project 1 | Project 2 | Project 3 | |
Purchase Price | $80,000 | $175,000 | $22,700 |
Required Rate of Return | 6% | 8% | 12% |
Time Period | 3 years | 5 years | 2 years |
Cash Flows – Year 1 | $48,000 | $85,000 | $15,000 |
Cash Flows – Year 2 | $36,000 | $74,000 | $12,000 |
Cash Flows – Year 3 | $22,000 | $38,000 | N/A |
Cash Flows – Year 4 | N/A | $26,800 | N/A |
Cash Flows – Year 5 | N/A | $19,000 | N/A |
Required Action:
Part A:
Prepare the year-end balance sheet for 2015. Be sure to use proper headings.
Prepare budgets such that the pro-forma financial statements for the first quarter of 2016 may be prepared.
Sales budget, including budgeted sales for April.
Purchases budget, the budgeted cost of goods sold for each month and quarter, and the cost of the March 31 budgeted inventory.
Selling expense budget.
General and administrative expense budget.
Expected cash receipts from customers and the expected March 31 balance of accounts receivable.
Expected cash payments for purchases and the expected March 31 balance of accounts payable.
Cash budget.
Budgeted income statement.
Budgeted statement of retained earnings.
Budgeted balance sheet.
Part B:
Calculate using Excel formulas, the NPV of each of the 3 projects.
It is possible that ABC Company may not be able to complete all 3 projects. Therefore, advise ABC Company as to the order in which they should pursue the projects (i.e., which project should ABC Company attempt to do first, second, and last).
Provide justification and analysis as to why you chose the order you did. The analysis must also be done in Excel, not in a separate document.
Case 8-31 Master Budget with Supporting Schedules [LO8-2, LO8-4, LO8-8, LO8-9, LO8-10]
You have just been hired as a new management trainee by Earrings Unlimited, a distributor of earrings to various retail outlets located in shopping malls across the country. In the past, the company has done very little in the way of budgeting and at certain times of the year has experienced a shortage of cash. |
Since you are well trained in budgeting, you have decided to prepare comprehensive budgets for the upcoming second quarter in order to show management the benefits that can be gained from an integrated budgeting program. To this end, you have worked with accounting and other areas to gather the information assembled below. |
The company sells many styles of earrings, but all are sold for the same price—$15 per pair. Actual sales of earrings for the last three months and budgeted sales for the next six months follow (in pairs of earrings): |
January (actual) | 21,800 | June (budget) | 51,800 |
February (actual) | 27,800 | July (budget) | 31,800 |
March (actual) | 41,800 | August (budget) | 29,800 |
April (budget) | 66,800 | September (budget) | 26,800 |
May (budget) | 101,800 | ||
The concentration of sales before and during May is due to Mother’s Day. Sufficient inventory should be on hand at the end of each month to supply 40% of the earrings sold in the following month. |
Suppliers are paid $4.9 for a pair of earrings. One-half of a month’s purchases is paid for in the month of purchase; the other half is paid for in the following month. All sales are on credit, with no discount, and payable within 15 days. The company has found, however, that only 20% of a month’s sales are collected in the month of sale. An additional 70% is collected in the following month, and the remaining 10% is collected in the second month following sale. Bad debts have been negligible. |
Monthly operating expenses for the company are given below: |
Variable: | |||
Sales commissions | 4% | of sales | |
Fixed: | |||
Advertising | $ | 290,000 | |
Rent | $ | 27,000 | |
Salaries | $ | 124,000 | |
Utilities | $ | 11,500 | |
Insurance | $ | 3,900 | |
Depreciation | $ | 23,000 | |
Insurance is paid on an annual basis, in November of each year. |
The company plans to purchase $20,500 in new equipment during May and $49,000 in new equipment during June; both purchases will be for cash. The company declares dividends of $21,750 each quarter, payable in the first month of the following quarter. |
A listing of the company’s ledger accounts as of March 31 is given below: |
Assets | ||
Cash | $ | 83,000 |
Accounts receivable ($41,700 February sales; $501,600 March sales) | 543,300 | |
Inventory | 130,928 | |
Prepaid insurance | 25,500 | |
Property and equipment (net) | 1,040,000 | |
Total assets | $ | 1,822,728 |
Liabilities and Stockholders’ Equity | ||
Accounts payable | $ | 109,000 |
Dividends payable | 21,750 | |
Common stock | 980,000 | |
Retained earnings | 711,978 | |
Total liabilities and stockholders’ equity | $ | 1,822,728 |
The company maintains a minimum cash balance of $59,000. All borrowing is done at the beginning of a month; any repayments are made at the end of a month. |
The company has an agreement with a bank that allows the company to borrow in increments of $1,000 at the beginning of each month. The interest rate on these loans is 1% per month and for simplicity we will assume that interest is not compounded. At the end of the quarter, the company would pay the bank all of the accumulated interest on the loan and as much of the loan as possible (in increments of $1,000), while still retaining at least $59,000 in cash. |
Required: | |
1. | Prepare a master budget for the three-month period ending June 30. Include the following detailed budgets: |
a. | A sales budget, by month and in total. |
b. | A schedule of expected cash collections from sales, by month and in total. |
c. | A merchandise purchases budget in units and in dollars. Show the budget by month and in total. (Round unit cost of purchases to 1 decimal place.) |
d. | A schedule of expected cash disbursements for merchandise purchases, by month and in total. |
2. | A cash budget. Show the budget by month and in total. (Cash deficiency, repayments and interest should be indicated by a minus sign.) |
3. | A budgeted income statement for the three-month period ending June 30. Use the contribution approach. |
4. | A budgeted balance sheet as of June 30. |