University of Maryland University College Income Statement Exercise

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gurzef2h

Business Finance

University of Maryland University College

Description

Your team has been hired to provide financial analysis for a start-up company, Bobble in Style, which produces customized bobble heads. The bobble heads are made out of less rigid materials and are more true to life than those of competitors. The company inventors, Mr. and Mrs. Lee, are going to pitch their idea to Shark Tank in a few months, but first they need to have a better understanding of the business financials. The Lee’s are already creating and selling their product from their home-based office and work area. They know what costs are involved with making the bobble heads on a small scale, but they don’t have an understanding of financial figures beyond basic costs. They need you to make sense of various financial figures for them. 

  1. Financial Statements: Develop an Income Statement for 20XX, Cash Flow Statement for 20XX, and Balance Sheet as of the end of 20XX based on the data provided below for year 20XX. All sales are collected when the sale is made and all expenses are paid when the expense is incurred. Explain the purpose of each financial statement.
    1. Income Statement Data for 20XX:
    • Units produced and sold = 420
    • Sales ($80 per unit selling price) = $33600
    • Cost of goods sold ($30 per unit, all variable costs) = $12600
    • Labor = $0 (Mr. and Mr. Lee were the only ones working and did not pay themselves)
    • Advertising fees =$2000
    • Bank fees = $150
    • Phone/internet = $1200
    • Shipping ($3 per unit) = $1260
    • Utilities = $900
    • Office supplies = $800
    • Interest expense on note payable = $350
    • Depreciation expense (straight line) = $800
    • Income tax rate = 26 %
  2. Other Financial Data for 20XX:
    • Proceeds from sale of equipment = $3000. The equipment originally cost $1000 and had accumulated depreciation of $200.
    • Purchase of equipment = $1600 (The machine is purchased on the last day of 20XX so no depreciation expense is recorded.)
    • Repayment of note payable = $5000
    • Consider any data relevant from the income statement.
  3. Balance Sheet Data for Beginning of 20XX:
    • Cash and cash equivalents = $10000
    • Accounts receivable = $0 (Cash is received at time of sale)
    • Raw materials inventory = $10500
    • Equipment = $5000 (This includes the $1000 cost of the equipment sold in 20XX).
    • Accumulated depreciation = $1,000 (This includes the accumulated depreciation of 200 for the equipment sold in 20XX.
    • Accounts payable = $0 (Cash is paid at the time of purchase.)
    • Note payable = $5000 (This is the note payable which is repaid in 20XX)
    • Common stock = $15000
    • Retained earnings = $4500
  4. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.
    1. Net Profit Margin
    2. Quick Ratio
    3. Debt-to-Equity Ratio
  5. Cost Classification: The Lee’s have provided you with the following costs and relevant information that are assumed for year 20XY. 

A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost. 

B. Explain the importance of distinguishing between variable and fixed costs. 

C. Prepare a budgeted income statement, assuming 600 units to be produced and sold, a per unit selling price of $85, an income tax rate of 28% and the following information. 

  1. Cost of goods sold of $35 per unit
  2. Labor = $400/month
    • One part-time employee will be hired to take care of packaging and shipping. This employee will be paid $10 per hour. He or she is estimated to work 40 hours total per month.
  3. Advertising fees = $3,000
  4. Bank fees = $200
  5. Phone/internet = $150 per month
  6. Shipping = $3 per unit
  7. Utilities = $100 per month
  8. Office Supplies = $900
  9. Conference Exhibitor Fee = $3000
  10. Travel Expenses for Conference (e.g. airfare, meals, taxi) = $1200

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Explanation & Answer

Attached. Please let me know if you have any questions or need revisions.

20XX
Revenues (or Income)
Gross Sales
Total Gross Sales
Coupons and Discounts
Net Sal...


Anonymous
Really helpful material, saved me a great deal of time.

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