Wondering if any kind souls out here would help me out with this project, or poi
ID: 2537870 • Letter: W
Question
Wondering if any kind souls out here would help me out with this project, or point me in the right direction. Bottom line, this is an online course and it's essentially impossible to learn and implement everything they expect from you. Below is the project requirements.
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
126,000
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
$13,000
Cash Flows – Year 2
$36,000
$74,000
$13,000
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.
Account
12/31/15
Ending Balance
Cash
50,000
Accounts Receivable
175,000
Inventory
126,000
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
Explanation / Answer
PART - A a) Balance Sheet of ABC Company as at 31st December 2015 Particulars Amount Amount Assets : Non - Current Assets Tangible Fixed Assets - Equipment $480,000 Less: Accumulated Depreciation ($90,000) $390,000 Current Assets Cash and Cash Equivalents $50,000 Accounts Receivable $175,000 Inventory $126,000 $351,000 Total $741,000 Equity and Liabilities Equity Common Stock $235,000 Retained Earnings (B/f) $138,000 $373,000 Non - Current Liabilities Long-term Notes Payable $200,000 Current Liabilities Accounts payable $156,000 Short-term Notes Payable $12,000 Total $741,000 Computation of Retained Earnings Considering the given information, the Retained earnings can be considered as the balancing figure on the Equity and liabilities side We know that in Balance sheet ,The total of Assets = Total of Equity and Liabilities Based on the given information, total of Assets = 741,000 (Equipment net of depreciation - 390,000 + Cash - 50,000 + Accounts receivable - 175,000 + Inventory - 126,000) Total of liabilities = Equity + Long term and Short term Notes ==> 741,000 = Common stock + Retained Earnings + Long term and Short term notes ==> 741,000 = 235,000 + Retained Earnings +200,000 + 12,000 + 156,000 ==> Retained Earnings = 138,000 b) Budgeted Forecast for First Quarter of 2016 Sales Budget Particulars Jan - 16 Feb - 16 Mar - 16 Number of Units to be sold 10,500 11,025 11,576 (Previous month + 5%) (10,000 x 105%) (10,500 x 105%) (11,025 x 105%) Expected Selling price $25 $25 $25 Sales in value $262,500 $275,625 $289,400 Purchase Budget We know that the formula, Opening stock + Purchases - Sales = Closing stock ==> Purchases = Sales + Closing Stock - Opening Stock Particulars Jan - 16 Feb - 16 Mar - 16 Sales (As per above workings) 10,500 11,025 11,576 Add: Closing stock 8,820 9,261 9724 (Closing stock = 80% of next month Sales) (11,025 x 80%) (11,576 x 80%) ((11,576x105%) x 80%) Less: Opening Stock 8,400 8,820 9,261 (as given) (previous month closing) (previous month closing) Purchase Units 10,920 11,466 12,039 Purchase price per unit $15 $15 $15 Budgeted Purchases $163,800 $171,987 $180,588 Budget for Cost of Goods sold Cost of Goods sold = Opening Inventory + Purchases - Closing Inventory Particulars Jan - 16 Feb - 16 Mar - 16 Total Opening Inventory $126,000 $132,300 $138,915 $126,000.00 (as given) Add: Purchases $163,800 $171,987 $180,588 $516,375.00 (as computed above) Less: Closing Inventory $132,300 $138,915 $145,860 $145,860.00 (Units as computed above x cost per unit) (8,820 x 15) (9,261 x 15) (9,724 x 15) Cost of Goods Sold $157,500 $165,372 $173,643 $496,515 Closing value of Inventory $132,300 $138,915 $145,860 (Units as computed above x cost per unit) (8,820 x 15) (9,261 x 15) (9,724 x 15) Cost of 31st March Inventory is $145,860 Selling Expense Budget Particulars Jan - 16 Feb - 16 Mar - 16 Total Sales representatives’ commissions $32,813 $34,453 $36,175 $103,441 (@ 12.5% on that month Sales) (262,500 x 12.5%) (275,625 x 12.5%) (289,400 x 12.5%) Sales Manager Salary $3,500 $4,000 $4,000 $11,500 (as given) Total $36,313 $38,453 $40,175 $114,941 General and administrative expense budget Particulars Jan - 16 Feb - 16 Mar - 16 Total Adminstrative Salaries 8,000 8,000 8,000 24,000 Depreciation 5,000 5,000 5000 15,000 Interest on Long term note payable 1,800 1,800 1,800 5,400 (200,000 x 0.9%) Total $14,800 $14,800 $14,800 $44,400 * Interest on Short term note payable is considered as other expenses Expected cash receipts from customers and the expected March 31 balance of accounts receivable Particulars Jan - 16 Feb - 16 Mar - 16 Total Expected Sales $262,500 $275,625 $289,400 $827,525 Sales on Credit basis (@ 70% on Total Sales) $183,750 $192,938 $202,580 $579,268 Opening receivables $175,000 $183,750 $192,938 $175,000 Add: Credit Sales $183,750 $192,938 $202,580 $579,268 Less: Cash collections $175,000 $183,750 $192,938 $551,688 (Previous month sales) Closing receivables $183,750 $192,938 $202,580 $202,580 Balance of Account receivables as at 31st March is $202,580 Expected cash payments for purchases and the expected March 31 balance of accounts payable Particulars Jan - 16 Feb - 16 Mar - 16 Total Opening Payables $156,000 $163,800 $171,987 $156,000 Add: Expected Purchases $163,800 $171,987 $180,588 $516,375 Less: Payments made $156,000 $163,800 $171,987 $491,787 Closing payables $163,800 $171,987 $180,588 $180,588 Balance of Account payables as at 31st March is $180,588 Cash Budget Particulars Jan - 16 Feb - 16 Mar - 16 Total Opening Cash Balance $50,000 $89,518 $50,000 $50,000 Add: Receipts - Cash Sales (30% on sales) $78,750 $82,688 $86,820 $248,258 (262,500 x 30%) (275,625 x 30%) (289,400 x 30%) - Collection from Account receivables $175,000 $183,750 $192,938 $551,688 (as computed above) - Availment of Short term notes (B/f) $0 $6,098 $0 $6,098 $303,750 $362,053 $329,757 $856,043 Less: Payments - Payments to Accounts payable $156,000 $163,800 $171,987 $491,787 (as computed above) - Selling Expenses $36,313 $38,453 $40,175 $114,941 (as computed above) - Administrative Expenses Salaries $8,000 $8,000 $8,000 $24,000 Interest on long term note payable $1,800 $1,800 $1,800 $5,400 - Interest on short term note payable $120 $0 $61 $181 (12000 x1%) (6098 x 1%) - Dividend proposed and payable $0 $100,000 $0 $100,000 - Equipment Purchases $55,000 $55,000 - Repayment of Short term notes (B/f) $12,000 $0 $2,734 $14,734 Closing Cash balance $89,518 $50,000 $50,000 $50,000 * Availment and Repayment of Short term notes are the balance figure of the budget after considering the minimum balance of 50,000 Budgeted Income Statement Particulars Jan - 16 Feb - 16 Mar - 16 Total Income Sales $ 262,500 $ 275,625 $ 289,400 $ 827,525 Less: Expenses Cost of goods sold $ 157,500 $ 165,372 $ 173,643 $ 496,515 Selling Expenses $ 36,313 $ 38,453 $ 40,175 $ 114,941 Administrative expenses $ 14,800 $ 14,800 $ 14,800 $ 44,400 Interest on Short term notes $ 120 $ - $ 61 $ 181 Profit before tax $ 53,768 $ 57,000 $ 60,721 $ 171,488 Provision for Income tax @ 35% $ 18,819 $ 19,950 $ 21,252 $ 60,021 (186,488 x 35%) Estimated profit after tax $ 34,949 $ 37,050 $ 39,469 $ 111,467 Budgeted statement of retained earnings Particulars Jan - 16 Feb - 16 Mar - 16 Total Opening retained earnings $ 138,000 $ 172,949 $ 109,999 $ 138,000 (as computed) Add: Estimated profit after tax $ 34,949 $ 37,050 $ 39,469 $ 111,467 Less: Dividend appropriations $ - $ 100,000 $ - $ 100,000 Closing $ 172,949 $ 109,999 $ 149,467 $ 149,467 Budgeted balance sheet as at 31st March 2016 Particulars Amount Amount Assets : Non - Current Assets Tangible Fixed Assets - Equipment $ 535,000 Less: Accumulated Depreciation $ (105,000) $ 430,000 Current Assets Cash and Cash Equivalents $ 50,000 Accounts Receivable $ 202,580 Inventory $ 145,860 $ 398,440 Total $ 828,440 Equity and Liabilities Equity Common Stock $ 235,000 Retained Earnings $ 149,467 $ 384,467 Non - Current Liabilities Long-term Notes Payable $ 200,000 Current Liabilities Accounts payable $ 180,588 Short-term Notes Payable $ 3,364 Provision for Taxes $ 60,021 Total $ 828,440 PART - B Computation of NPV for all the three projects Net Present Value = Present Value of Cash Inflows - Present value of cash outflows Project - 1 Rate - 6% Year Cash Flow PV Factor Present value $14,900.49 Y0 ($80,000) 1 ($80,000) Y1 $48,000 0.943 $45,283 Y2 $36,000 0.890 $32,040 Y3 $22,000 0.840 $18,472 NPV 15,795 Project - 2 Rate - 8% Year Cash Flow PV Factor Present value Y0 ($175,000) 1 ($175,000) Y1 $85,000 0.926 $78,704 Y2 $74,000 0.857 $63,443 Y3 $38,000 0.794 $30,166 Y4 $26,800 0.735 $19,699 Y5 $19,000 0.681 $12,931 NPV $29,942 Project - 3 Rate - 12% Year Cash Flow PV Factor Present value Y0 ($22,700) 1 ($22,700) Y1 $13,000 0.893 $11,607 Y2 $13,000 0.797 $10,364 NPV ($729) Ranking of Projects - The project ranking will be done based on the NPV's i.e, Project with highest NPV will be ranked 1 and so on Rank Project NPV 1 2 $29,942 2 1 $15,795 It is not advisable to undertake Project - 3, as it yields negative NPV
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