Who owns more of the company’s assets, the creditors or the shareholders? (4 marks) According to the Balance Statement as of December 31 , 2008 for Toronto Service Inc. , Liabilities totaled $128,000. 00 and Equity totaled $168,000. 00. Equity accounts for the greater total between liabilities and total equity. Liabilities are the amounts you owe to creditors, while Equity is the value of ownership (Shareholders). Thus, the shareholders own more of the company’s assets than do the creditors. Question 2 15 marks (3 marks each) If you could pick a single source of cash for your business, what would it be?
Why? In considering sources of cash for your business, cash flows (in this instance we are concentrating on cash inflows) can be “classified under three types of business activities: operating activities, investing activities, and financing activities” (James Kimball, p. 486). In the case of operating activities, cash inflows result from sales of goods or services, shares or income earned on investments. Investing activities that result in cash inflows include the selling of long-term assets (capital assets).
While financing activities that result in cash inflow include the inflow of cash from investors (ii. Banks and shareholders). Taking into account the three sources of cash available to a business, the single best source of cash for a business is operating activities. This source of cash is best as it results from the core operations of the business. In other words, the cash is received as a result of the company’s internal business activities. Cash from operating activities must be net positive if the business is to remain solvent.
How can a business earn large profits but have a small balance in Retained Earnings? Profit (or loss) is determined from the Income Statement. The Income Statement is a “financial statement that presents the revenues and expenses and resulting profit (or loss) for a specific period of time (Wiley, p. 27). When a company generates a profit, earnings can either be paid out to shareholders as dividends, or reinvested in the business (retained earnings). Both the retained earnings and dividends are accounted for on the balance sheet under shareholder equity.
In consideration of the aforementioned facts, a business can earn large profits but have a small balance of Retained Earnings by paying out large dividends. As a dividend is not an expense (not reported on the Income Statement), the dividend does not reduce the current accounting period’s profit reported on the Income Statement. Therefore, dividends paid to not change the income for the business, but lower the retained earnings subsection of owners’ equity on the balance sheet. How can a business lose money for many years and still have plenty cash? Refit (or loss) for a specific period of time (Wiley, p. 27). The Cash Flow Statement is a “financial statement that provides information about the cash inflows (receipts) and cash outflows (payments) for a specific period of time Wiley, p. 26). A business can show a net loss on their Income Statement for many years and still have plenty of cash reported on their Cash Flow Statement due to financing activities. Fifth business takes out a loan, this inflow of cash is reported on the cash flow statement, but it is not reported on the income statement since it is not actual income.
This negative effect on the company’s net income and positive effect on the company’s cash flow can be magnified when the financing activities are utilized to fund the purchase of capital assets that is depreciated over many years, as depreciation expenses reduces a Meany’s net income, which can result in a net loss, but does not involve the payment of cash in the current period. Give two reasons why a business can be profitable for many years and still have a cash shortage?
Two reasons why a business can be profitable for many years and still have a cash shortage include; heavy investing activity and paying off debts. Investing Activities include cash flows related to the buying of long-term assets (ii. Payments to buy debt or equity securities in other companies, buying equipment, buying a building, and buying a business). Heavy investing results in a decrease of cash. Financing Activities include cash flows related to repurchasing stock, paying off loans to debt holders, and making dividend payments to investors.
Paying of debt results in a decrease of cash. Money is withdrawn from the bank account and sent to the lender. The purchase of assets or payment of liabilities does not affect the income statement, but has a negative effect on the cash flow statement. If a purchase or a repayment transaction is large enough, it can negate the effect of profits to the scofflaws. Suppose your business has $80,000 worth of liabilities that must be paid within the next three months. Your liquid (can be turned into cash quickly) assets total only $60,000, your sales and collections from customers are slow.
Identify two ways to finance the remaining $20,000 you will need, so you can pay all of the liabilities when they are due. In consideration of the above, the business has the inability to pay its liabilities within the next three months through its Operating Activities (cash flow is not solid). Nor does the business have the ability to pay its liabilities through Investing Activities such as the selling of long-term assets (total assets do not cover total liabilities owed within the next three months). This leaves the equines with the option of paying its liabilities through Financing Activities.
Financing activities involve stockholders’ (or owners) equity and long-term liabilities, specifically, issuing stock and issuing long-term debt Games Kimball, p. 499). Financing activities that involve stockholders’ equity include the issuance of common stock or preferred stock. Increases in the stock accounts will be reported in the Financial Activities section of the Statement of Cash Flows as positive amounts. Thus the issuing of stock and the positive reflection on the Statement of Cash Flows signifies that cash was provided, which provides a resource of cash.
Financing activities that involve long-term liabilities include the issuance of bonds. Increases in the bond payable will be reported in the Financial Activities section of the Statement of Cash Flows as positive amounts. Thus the issuing of bonds and the positive reflection on the Statement of Cash Flows signifies that cash was provided, which provides a source of cash. PART II TOTAL MARKS 40 MARKS Janice College heads the Training Centre of the large HER Consulting firm MET Consulting. The firm has three major departments: Recruitment, Training and Career Services.
The Training Centre provides management training for employees of various businesses. Recruitment provides recruitment services and Career Services assists personnel with resumes and offers advice on career planning. The Training Centre employs 2 administrative assistants, 1 training officer and Janice, the manager on a permanent basis. Part-time trainers are hired on an as-needed basis. Part-time trainers are paid $1500 per workshop. During 2008 the Training Centre conduction 200 workshops with 20 individuals in each. The charge per individual was $300.
This is the maximum number of workshops that can be held in a year. Following are the results for 2008. I Training Revenue (200 x 20 x $300) I I Less Expenses: I Trainer costs (200 x 2 x $1 500) I Manager’s Salary I Training officer I Administrative staff I Utilities/phone costs I Manuals for participants I Advertising costs I Postage & other miscellaneous costs I Total expenses I Income from operations | 600,000 | 120,000 | 90,000 | 80,000 | 20,000 | 125,000 | 9,450 1,164,450 I Net Income or $35,550 revenue) (loss) I I Common Allocated costs (10% of a.
Classify each of the costs as variable or fixed. (5 marks) Cost Cost Classification Trainer costs (200 x 2 x $1500) Variable Manager’s Salary Fixed Training officer Fixed Administrative staff Utilities/phone costs Manuals for participants Variable Advertising costs Postage & other miscellaneous costs Variable b. What would be the effect on the profit of the whole company, if the Training Centre was closed at the beginning of the new year? 5 marks) Note :elf the Training Centre is closed, one administrative staff will be retained to work in the Career Services department. Incremental Analysis can be used to determine the effect on the profit of the whole company if the Training Centre was closed at the beginning of the new ear. Incremental Analysis is the “analysis of the incremental revenue and the incremental costs incurred when one decision alternative is chosen over another (James Kimball, p. 248).
Incremental revenue is the “additional revenue received as a result of selecting one decision alternative over another” (James Kimball, p. 248). Incremental cost is the “additional cost incurred as a result of selecting one decision alternative over another” (James Kimball, p. 248). In analyzing the Training Center’s Income Statement, the department is currently showing a loss of $84,450. If the Training Centre is loosed, Revenue will decline by $1,200,000. Some costs will decrease or be eliminated altogether.
Trainer Costs of $600,000 would be eliminated, the Manager’s Salary of $120,000 would be eliminated, the Training Officer’s Salary of $90,000 would be eliminated, one Administrative Staff Salary would be eliminated of $40,000 (assumption that both Administrative Staff earn the same salary for simplicity), cost of Manuals for Participants of $120,000 would be eliminated, Advertising Costs of $125,000 would be eliminated (assumption that these Advertising Costs were a direct cost of the Training Centre and not a common cost) and Postage & other miscellaneous costs of $9,450 would be eliminated (assumption that these costs were a direct cost of the Training Centre and not a common cost). Thus, a total of $1, 104,450 of direct costs to the Training Centre is avoidable and can be eliminated. Considering that one administrative staff will be retained to work in the Career Services department, the cost of $40,000 for salary is reallocated to the Career Services department. Also, the common allocated costs of $120,000 are not avoidable and will be reallocated to the remaining departments; Recruitment and Career Services. It is assumed that the axed costs for the Utilities/Phone of $20,000 will not decrease because the one department is eliminated, thus it does not represent a cost savings.
The difference in revenue, costs and net difference is indicated below: Income with Income without Training Centre Training Centre Difference I I Trainer costs (200 x 2 x $1500) Salary I I Training officer O | (600,000) 90,000 o I I Manager’s | (120,000) 80,000 (90,000) 40, 000 20,000 125,000 I I Administrative staff | (40,000) I I Utilities/phone costs miscellaneous costs I I Total expenses 0 (120,000) (125,000) 9,450 I Lincoln from operations I I Manuals for participants I I Advertising costs I I Postage & other (9,450) | $60,000 | $35,550 I Net Income or (loss) To summarize, the analysis of incremental costs and revenues indicates that income of $95,550 will be lost if the Training Centre was closed at the beginning of the new year. Thus, there would be a negative effect on profit of the whole company. Given the allocated costs at 10% of revenue, calculate the number of workshops that must be offered to break-even. (10 marks) In order to calculate the number of workshops that must be offered to break- even a number of steps must be completed.
First, you must determine the arable cost per unit. Variable costs are “costs that change in proportion to changes in volume or activity’ (James Kimball, p. 120). The variable cost per unit can be calculated by dividing the total variable cost by the number of units. In this case the variable cost per unit is determined as outlined below: Variable Cost Per Unit = Total Variable Cost Number of Units = Trainer Costs + Manuals + Postage & Miss. 200 -$600,000 + $120,000 + $9,450 -$3,647. 25 You must also determine the fixed costs, which are defined as “costs that do not change in response to changes in activity levels” (James Kimball, p. 120).
In this ease, the total fixed costs is determined by adding the Manager’s Salary, Training Officer’s Salary, Administrative Staffs Salary, Utilities/Phone costs, Advertising costs (for simplicity – totaling all fixed costs and not considering discretionary fixed costs that can be changed in the short run) and Common Allocated Costs. The total fixed costs are calculated to be $555,000. The unit price must also be considered in calculating the number of workshops that must be offered to break-even. In this case, the unit price is the price per workshop which equals $6,000 (assumption that each workshop includes 20 individuals at a charge f $300 each). In order to calculate the break-even point, the profit equation is utilized. The profit equation states that “profit is equal to revenue, minus variable cost, minus total fixed cost” (James Kimball, p. 130).