After investigating the different forms of business organization, Natalie Koebel

Question

After investigating the different forms of business organization, Natalie Koebel
decides to operate her business as a corporation, Cookie Creations Inc., and she begins
the process of getting her business running.
While at a trade show, Natalie is introduced to Gerry Richards, operations manager
of “Biscuits,” a national food retailer. After much discussion, Gerry asks Natalie to
consider being Biscuits’ major supplier of oatmeal chocolate chip cookies. He provides
Natalie with the most recent copy of the financial statements of Biscuits. He expects that
Natalie will need to supply Biscuits’ Watertown warehouse with approximately 1,500
dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid
approximately 30 days from the date the invoice is received in Biscuits’ Chicago office.
Natalie is thrilled with the offer. However, she has recently read in the newspaper
that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar
and fat, and as a result, consumer demand for the company’s products has decreased.
Instructions
Natalie has several questions. Answer the following questions for Natalie.
(a) What type of information does each financial statement provide?
(b) What financial statements would Natalie need in order to evaluate whether Biscuits
will have enough cash to meet its current liabilities? Explain what to look for.
(c) What financial statement would Natalie need in order to evaluate whether Biscuits
will be able to survive over a long period of time? Explain what to look for.
(d) What financial statement would Natalie need in order to evaluate Biscuits’ profitability?
Explain what to look for.
(e) Where can Natalie find out whether Biscuits has outstanding debt? How can Natalie
determine whether Biscuit would be able to meet its interest and debt payments on
any debts it has?
(f) How could Natalie determine whether Biscuits pays a dividend?
(g) In deciding whether to go ahead with this opportunity, are there other areas of
concern that she should be aware of?

Explanation / Answer

a) Balance sheet - breakup of assets, liabilities & Equity Income statement (profit and loss) - income & expenses cash flow statement - cash flow activities in respect to operating investing financing activities + retained earnings or something, shows retained earnings b) - balance sheet c) - balance sheet/cash flow statement d) - income statement - need to look at income less expenses to see what profit bisuits has made, its cash situation is irrelevant e) - balance sheet, compare current liabilities on bal sheet to assets f) - retained earnings? g) yes, no idea what (correctness of financial statements, trend of business, trend of economy etc etc etc)

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