CAC 510 FINANCIAL ACCOUNTING Assignment 7 Questions Case: The 10 Beach Hut by Da
ID: 2538606 • Letter: C
Question
CAC 510 FINANCIAL ACCOUNTING
Assignment 7 Questions
Case: The 10 Beach Hut by Dana Gillett and Julie Harvey, Richard Ivey School of Business
1. What was Mandy Arlington’s business?
2. What was Mandy Arlington’s brand name?
3. Explain what “sole proprietorship” is.
4. Would you say the idea of sole proprietorship was in line with the vision of the protagonist? Advise Mandy on this issue.
5. Losses were incurred in the first few years. a. Comment about this.
b. After how many years was a profit made?
c. How do you explain the fact that the business made losses for all the years you have indicated and yet was able to survive?
6. In exhibit 2, there is an item “drawings”. Explain its meaning in regard to (1) sole proprietorship and (2) Company
7. Using Exhibit 3;
(a) Explain what is meant by “prepaids.”
(b) Compute the working capital of the business for 2003 and 2004. Explain what your figures mean.
THE 10 BEACH HUT
Upon graduation, a young business school student, Mandy Arlington, decided to follow her dream of becoming a clothing designer. After much thought, she decided to design her own line of beachwear to be sold in beach towns across the province of Ontario in Canada. Arlington would design the clothing and have it produced by a local manufacturer. After researching suppliers, manufacturers, vendors and office locations, Arlington’s clothing line, The 10 Beach Hut, was launched as a sole proprietorship in January of 2001, in time for the upcoming spring season. Operations started slowly and losses were incurred in the first few years; however, by 2004, sales resulted in a profit as demand grew for the 10 beach Hut wear. Selected financial statements for 2003 and 2004 are shown in Exhibits 1, 2 and 3.
Exhibit 1
STATEMENT OF EARNINGS
For the year ending December 31, 2004
Net Sales $ 296,475
Cost of goods sold 221,109
Gross profit 75,366
Operating expenses
Selling and administration $ 48,384
Amortization 6,106
Interest 14,115
68,605
Net income $ 6,761
Additional note regarding 2004 operations:
The owner made an additional $5,580 capital in October 2004 (see Exhibit 2).
Exhibit 2
STATEMENT OF CAPITAL
For the year ending December 31, 2004
Beginning Capital (2003) $ 45,627
Net income 6,761
Capital investment 5,580
57,968
Less: drawings 3,283
Ending capital (2004) $ 54,685
Exhibit 3
BALANCE SHEETS
For the years ending December 31, 2003 and 2004
ASSETS 2004 2003
Current assets:
Cash $ 3,939 $ 1,970
Accounts receivable 73,856 60,726
Inventory 65,322 58,100
Prepaids 1,313 1,641
Total current assets $144,430 $122,437
Fixed assets¹:
Land 16,084 16,084
Building & fixtures $ 79,764 $ 72,543
Less: accum.amortization 20,548 59,216 14,442 58,101
Total net fixed assets 75,300 74,185
Total assets $ 219,730 $ 196,622
LIABILITIES & OWNER’S EQUITY
Current liabilities:
Bank indebtedness $ 32,760 $ 23,962
Accounts payable 40,375 31,840
Total current liabilities 73,135 55,802
Long-term debt 91,910 95,193
Total Liabilities 91,910 95,193
Owner’s equity:
Owner, capital 54,685 45,627
Total liabilities and owner’s equity $ 219,730 $ 196,622
¹ Several fixed assets worth $7,221 were purchased throughout the year, however, no fixed assets were sold during the year.
Explanation / Answer
Solution 1
Mandy Arlington’s business was of a clothing designer. She used to design her own line of beachwear to be sold in beach towns across the province of Ontario in Canada
Solution 2
Mandy Arlington’s business brand name was 'The 10 Beach Hut'
Solution 3
Sole proprietorship is a form of business wherein it is owned and managed by a single person. He is the sole person responsible of contributing capital, running the business, and has 100% right on both the profits and losses of the business. It is different from partnership form and company form wherein more than 1 person are co-owners.
Solution 4
Yes the idea of sole proprietorship was right for Mandy as she was the lone member who was responsible for the idea and execution of the business. The idea was correct as she wanted to be clothing designer, and product beachwear was apt for beachside towns in Ontario district for upcoming spring season
Solution 5
(A) Losses was incurred for first three years of operations (2001-2003) due to lack of demand in initail years as the business had just started in 2001. It takes time to build brand and awareness about the product
(B) Profit was made in year 2004 after 3 years of starting business (in 4th year)
(C) The business had made losses for first three years and still survived as it had contributed a good initial capital, which did not erode away due to the losses in three years. Alternatively, combined losses of three years was less than initial capital contributed. Moreover fresh capital was again introduced in 2004
Solution 6
(1) Drawings for sole proprietor business would be withdrawl of capital from the business for personal use and expenses. It reduces the capital of the business
(2) Drawings from company's perspective would be share buyback program wherein there is paying off to the shareholders consequent to share re-purchase
Solution 7
(A) Prepaid as shown in Exhibit on asset side means expenses which do not relate to current financial year yet has been paid in advance hence an asset for the current year. It means advance payment of future expenses, which are recorded as assets currently and recognised as expenses in the time to which it relates to
(B) Working capital = (Current Assets - Current liabilities)
For year 2004, Current assets = 144430 and current liabilities = 55802
Hence working capital 2004 = (144430-55802) = 88628
For year 2003 Current assets = 122437 and current liabilities = 73135
Hence working capital 2003 = (122437-73135) = 49302
Working capital is the amount of capital invested in the daily operations of the business (to purchase raw materials, sell goods, and payoff vendors etc)' There is an increase in working capital in 2004 due to higher inventory, higher accounts receivables, lower accounts payables
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.