Accounting Statement of Cash Flows and Contribution Margin

Based on the information in the attached document, you will need to answer/complete the following.

Required:

1.Develop a Statement of Cash Flows for Owens Jewelry Products for the 2nd year ending December 31, 20xx.

2. Analyze the financial performance of Owens Jewelry Products based on ALL the financial statements (using ratios and cash flows.)

3. If you were Karl Owens, how would you explain to Theodore Miser the financial situation to help justify the loan request? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

4. If you were Theodore Miser, would you approve the loan for Owens Jewelry? Why or why not? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

AS WELL AS ANSWER,

1. Compute the contribution margin.

2. Compute the contribution margin ratio.

3. Compute the break-even in sales units.

4. Compute the break-even in sales dollars.

5. Compute the margin of safety in units.

6. Prepare a contribution income statement for the year end.

7. Compute the unit sales required for a monthly after-tax profit of $50,000.

Quiz 3 has Two parts-Statement of Cash Flows and Contribution Margin
Part 1 Statement of Cash Flows
Karl and Kristin Owens owns two Owens Jewelry Products stores in Florence, South Carolina.
He believes that the stores have been successful and he wants to open a new store in Sumter
about 30 miles west of Florence. Karl has been in the retail line for over 30 years, and he worked
at his uncle’s hobby shop while in high school and college before starting his own store at the
age of 25. Kristen used to be a legal assistant at a local law office before quitting to help her
husband run the jewelry store.
Two big secrets to a successful jewelry store operation are good location and product selection.
Karl’s first store is located in downtown Florence. Since he had been born and raised in
Florence, he attracted a good customer base that remained loyal to his store after some of the
giant chain related jewelry stores began to move into the area. About 10 years ago, Karl saw the
change in customer shopping habits and purchased a second store near an interchange to
Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and
Karl could not totally rely on the “good old boy” market alone to sustain his market share. This
second store catered to the younger more mobile generation that shopped at or near malls.
Karl now was looking into other markets. Sumter was not located on the interstate, but the area
was growing because of its proximity to the state capital of Columbia, which was just 30 miles to
its west. Karl believed that the people of Sumter who commuted to work in Columbia would
prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since
Karl was a respected citizen of Florence, his reputation as an honest businessman had spread to
Sumter. He believed he could quickly build up a new customer base in that location. The big
chain type stores also did not seem as interested in the Sumter area, preferring instead to locate in
the larger metropolitan areas of Columbia and Florence. The appropriate jewelry items to feature
in his stores were very important. Karl felt that his area of influence was strictly regional, and he
did not have to carry much of the standard inventory of the national chain type of jewelry stores.
His jewelry was more a reflection of local interest; thus a lot of his wedding ring sets and related
items were hot sellers.
Karl went to the Florence National Bank to inquire about funding for the new store location. He
had found an abandoned furniture store in downtown Sumter along Main Street that was up for
sale for $350,000. The store seemed to be the right size and at a good location. A grocery store
was in the same block with ample off street parking. He brought his balance sheet for the last
two years and an income statement for the last operating year to the bank to support his request
for a retail loan of $350,000. (Copies of the financial statements are listed at the end of the quiz).
Theodore Miser, the local bank loan vice president had been a friend of Karl’s for many years.
He was a customer at Karl’s jewelry store and purchased his wedding ring set from Karl’s store,
and his bank had underwritten the funding for the second store. Theodore was excited about
Karl’s expansion goals and the prospect of another business loan with his friend. At the same
time, Theodore had to live up to his reputation and because of interest rates being what they are,
he had to be very critical of any loan coming across his desk. He was not about to approve a loan
unless he was almost 100 percent sure that the borrower would not default. Karl’s past success
had alleviated much of Theodore’s concern, but he still wanted to complete a detailed analysis of
the financial performance of Owens Jewelry Products during the last calendar year. Upon
reviewing the balance sheet, Theodore knew with the covid pandemic recently, foot traffic was
reduced at many retail stores, but Owens Jewelry Products showed a strong profitable
performance. The current financial statements did not seem to give enough information to
answer Theodore’s questions and he asked Karl to prepare a statement of cash flows for the year
ending December 31, 20xx. Karl has come to you for some help with this loan.
Additional transaction data
A. Equipment costing $21,375 with a accumulated depreciation of $11,100 is sold for cash. .
B. New equipment was purchased for cash.
D. Accumulated depreciation is affected by depreciation expense and the sale of equipment.
E. All sales are made on credit.
F. All inventory purchases are on credit.
G. Accounts payable balances result from inventory purchases.
H. Prepaid expenses relate to other operating expenses.
Required:
1. Develop a Statement of Cash Flows for Owens Jewelry Products for the 2nd year ending
December 31, 20xx.
2. Analyze the financial performance of Owens Jewelry Products based on ALL the financial
statements (using ratios and cash flows.)
3. If you were Karl Owens, how would you explain to Theodore Miser the financial situation
to help justify the loan request? (Not just yes or no question, please ratios and cash flows to
support your analysis in your answer!)
4. If you were Theodore Miser, would you approve the loan for Owens Jewelry? Why or
why not? (Not just yes or no question, please ratios and cash flows to support your analysis
in your answer!)
Owens Jewelry Products info for the last two years Balance sheets
Balance Sheet
Assets
Current Assets
Cash
Accounts receivable
Inventory
Prepaid Expenses
Long term assets
Equipment
Accumulated Dep. Plant assets
Total Assets
Year 2
Year 1
$43,050
34,125
156,000
3,600
$23,925
39,825
146,475
1,650
135,825
(61,950)
$310,650
146,700
(47,550)
$311,025
Liabilities
Current Liabilities
Accounts Payable
Income Tax Payable
Dividends Payable
28,800
5,100
0
33,750
4,425
4,500
Long-term liabilities
Bonds Payable
0
37,500
$33,900
$80,175
Stockholders’ Equity
Common Stock $10 par
168,750
Retained Earnings
108,000
Total Liab. And Stockholders Equity
Total Liab. And Stockholders Equity $ 310,650
168,750
62,100
Total Liabilities
$311,025
Owens Jewelry Products Income Statement last year
Income Statement Year 2
Sales Revenue
Costs of Goods Sold
Gross Profit
Operating Expenses
Other Operating Expense
Depreciation Expense-Plant Assets
Total Operating Expenses
Operating Income
Other Revenue and Expenses
Loss on Sale of Plant Assets
Loss on retirement of bonds
Total other Rev and Exp.
Net Income Before Taxes
Income Tax Expense
Net Income
$ 446,100
222,300
223,800
$120,300
25,500
368,100
78,000
3,300
825
(4,125)
73,875
(13,725)
$60,150
Part Two Contribution Margin
Albert and Alice Johnson set up a company called Heavenly Music Incorporated. They provide
music CDs around the Washington, D.C. area for various musical artist and aspiring musical
artists. The company sold 12,000 CDs and they sell for $18 each for the year ended December
31. The tax rate is 21%.
Variable production costs
Plastic for casing – $1,500
Wage of assembly workers – $30,000
Labeling – $3,000
Selling and Administrative-$6,000
Fixed manufacturing costs
Rent on Factory – $6,750
Factory maintenance – $4,520
Factory machine depreciation – $20,000
Fixed selling and administrative costs
Lease of equipment – $1,050
Accounting staff salaries – $15,000
Administrative management salaries – $120,000
Required: Please complete the following:
1. Compute the contribution margin.
2. Compute the contribution margin ratio.
3. Compute the break-even in sales units.
4. Compute the break-even in sales dollars.
5. Compute the margin of safety in units.
6. Prepare a contribution income statement for the year end.
7. Compute the unit sales required for a monthly after-tax profit of $50,000.