attached assignment
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 hobby 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, preferring 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 carry 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 brought 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 borrower 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 current 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 Current 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 Current 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 par 370,000 250,000 Retained Earnings 110,000 80,000 Treasury Stock (20,000) 0 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 156,000 Gross Profit 130,000 Operating Expenses Salaries and Wages Expense $56,000 Depreciation Expense-Plant Assets 20,000 Advertising Expense 16,000 Total Operating Expenses 92,000 Operating Income 38,000 Other Revenue and Expenses Interest Revenue 12,000 Dividend Revenue 9,000 Gain on Sale of Plant Assets 10,000 Interest expense (15,000) Total other Rev and Exp. 16,000 Net Income Before Taxes 54,000 Income Tax Expense 14,000 Net Income 40,000 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 break-even in sales units. 4. Compute the break-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.