# Cash Flow Statement and Balance Sheet

Scenario: 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.

Excel file with relevant calculations. The specific financial analysis tasks and related information are listed below (#1-8).

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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.
2. 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)
• 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 %
1. 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.
1. 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
1. Financial Ratios: Calculate the following financial ratios and explain the meaning of the results.
2. Net Profit Margin
3. Quick Ratio
4. 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.
6. A. Classify each of the costs (a. through j.) below under C. as a variable cost or a fixed cost.
7. B. Explain the importance of distinguishing between variable and fixed costs.
8. C. build and show 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.
9. Cost of goods sold of \$35 per unit
10. 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.
2. Bank fees = \$200
3. Phone/internet = \$150 per month
4. Shipping = \$3 per unit
5. Utilities = \$100 per month
6. Office Supplies = \$900
7. Conference Exhibitor Fee = \$3000
8. Travel Expenses for Conference (e.g. airfare, meals, taxi) = \$1200
9. Net Present Value: The Lees are considering adding a new piece of equipment that will speed up the process of building the bobble heads. The cost of the piece of equipment is \$42000. It is expected that the new piece of equipment will lead to cash flows of \$17000, \$29000, and \$40000 over the next 3 years. If the appropriate discount rate is 12%, what is the NPV of this investment? Explain the findings.
10. Budget Preparation: The Lees believe that production and sales could double after being on Shark Tank which is scheduled in December of 20XY. They want to be ready for this. Based on the budgeted income statement calculated above for 20XY, build and show a new budgeted income for 20XZ assuming that the production and sales is double the level of 20XY.
11. Incremental Analysis: If production does increase dramatically after their presentation on Shark Tank, the Lees will need more space for production. They have two options. Option 1 is to rent out a spacious warehouse nearby. If they pursue this option, there rent will be \$1200 per month and utilities are estimated to cost an additional \$350 per month. Their second option, Option 2, is to rent a smaller storefront space that is also nearby. The storefront rent is \$1350 per month. However, utilities will likely only cost an additional \$150 per month. They want to compare their options over one year’s time (since each rental contract is a 1 year commitment). What is the incremental analysis if the Lees choose Option 1 over Option 2?
12. Break-Even Analysis: You have been asked to calculate how many units need to be sold to break even, based on the costs provided in task #3. Assume that only one conference will be attended and the estimated expenses associated with this conference are on target. Use the information in task #3 except do not consider taxes.)
13. Contribution Margin: Based on the Break-Even Analysis just performed, what is the contribution margin per unit and the total contribution margin?

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