1. [Stockholders’ Equity] The owners of a new venture have decided to organize as a corporation.
The
initial equity investment is valued at $100,000, reflecting contributions of the entrepreneur and her
family and friends. One hundred thousand shares of stock were initially issued.
A. What dollar amount would initially be recorded in the common stock account?
B. If a par value on the common stock were set at $0.01 per share, show how the initial equity
investment would be recorded.
C. Now assume that 20,000 additional shares of stock are sold to an angel investor at $5 per share
six months after the initial incorporation. Show how your answer in Part A would change if the
common stock did not have a par value. Also show how your answer in Part B would change
given a par value of $0.01 per share.
D. At the end of the first year of operation, the venture recorded an operating loss of $80,000.
Show the dollar amounts in the common stock account, the additional paid-in-capital account,
and the retained earnings account at the end of one year. Also indicate the cumulative amount
in stockholders’ equity at the end of one year.
1 (A)
Common stock account = $100000
1 (B)
Assumption: has par value $0.1
Equity accounts Debit Credit
Common stock (par value $0.01) 1000
Additional paid in capital 99000
Owners’ equity 100000
1 (C)
Common stock (no par value)
Initial investment = $100000
Sold to investor = $5 x 20000 shares = $100000
Total shareholder equity = $200000
Common stock (par value)
Common stock (par value) = (100000 shares + 20000 shares) x 0.01 = $1200
Additional paid up capital = $198800
Total shareholder equity = $200000
1 (D)
Common stock account = $1200
Additional paid up capital = $198800
Retained earnings = -$80000
Total shareholder equity = $120000
2. [Internal Operating Schedules] Assume you are starting a new business involving the manufacture and
sale of a new product. Raw materials costs are $40 per product. Direct labor costs are expected to be
$30 per product. You expect to sell each product for $110. You plan to produce 100 products next
month and expect to sell 90 products.
A. Prepare cost of production, cost of goods sold, and inventories schedules for next (the first)
month.
B. During the second month, you plan to produce 110 products but expect sales in the month to be
115 products. Prepare cost of production, cost of goods sold, and inventories schedules for the
second month.
2 (A) (B)
Cost of Production Schedule
Cost per unit 1st month 2nd month
Production (units) 100 110
Production costs
Raw material 40 4000 4400
Direct labor 30 3000 3300
Total costs 70 7000 7700
Cost of Goods Sold Schedule
Sales (unit) 90 115
Costs @70/unit 70 6300 8050
Inventories Schedule
Beginning finished 0 700
goods
Production:
Raw material 4000 4400
Direct labor 3000 3300
Additions 7000 7700
Total (Beg. + Add.) 7000 8400
Less: Cost of goods (6300) (8050)
sold
Ending finished goods 700 350
3. [Internal Operating Schedules] Assume you have developed and tested a prototype electronic product
and are about to start your new business. You purchase preprogrammed computer chips at $70 per unit.
Other component costs include plastic casings at $15 per unit and assembly hardware at $5 per unit.
Direct labor costs are $15 per hour and three units can be produced per hour. You intend to sell each
unit at a 50 percent markup over the total costs of producing each unit. The plan is to produce 500
product units per month in January, February, and March. Sales are expected to be 200 units in January,
400 units in February, and 800 units in March.
A. Calculate the dollar amount of sales revenue expected in each month (i.e., January, February,
and March) and for the first quarter of the year.
B. Prepare a cost of production schedule for January, February, and March.
C. Prepare a cost of goods sold schedule for each of the three months and for the first quarter of
the year. Using your cost of goods sold estimates and the sales revenues expected in Part A,
calculate the gross earnings for January, February, and March, as well as for the first quarter of
the year.
D. Prepare an inventories schedule for January, February, and March.
1 (A) (B) (C) (D)
Cost of Production Schedule
Cost per unit Jan Feb March
Production 500 500 500
(units)
Production costs
Computer chips 70 35000 35000 35000
Plastic casings 15 7500 7500 7500
Assembly 5 2500 2500 2500
hardware
Direct labor 15/3 = 5 2500 2500 2500
Total costs 95 47500 47500 47500
Sales (units) 200 400 800
Markup @50% 142.5 28500 57000 114000
Cost of Goods Sold
Jan Feb March 1st quarter
Sales (units) 200 400 800 1400
Cost @95/unit 95 19000 38000 76000 133000
Gross earnings 142.5-95 = 9500 19000 38000 66500
estimate 47.5
Inventories Schedule
Beginning 0 28500 38000
inventories
Production:
Production costs
Computer chips 35000 35000 35000
Plastic casings 7500 7500 7500
Assembly 2500 2500 2500
hardware
Direct labor 2500 2500 2500
Additions 47500 47500 47500
Total (beg. + 47500 76000 85500
add.)
Less: Cost of 19000 38000 76000
goods sold
Ending 28500 38000 9500
inventories
5. [Survival Revenues Breakeven] During its first year of operations, the SubRay Corporation produced
the following income statement results:
Costs of goods sold are expected to vary with sales and be a constant percentage of sales. The general
and administrative employees have been hired and are expected to remain a fixed cost. Marketing
expenses are also expected to remain fixed because the current sales staff members are expected to
remain on fixed salaries and no new hires are planned. The effective tax rate is expected to be 30
percent for a profitable firm.
A. Estimate the survival or EBDAT breakeven amount in terms of survival revenues necessary for
the SubRay Corporation to break even next year.
B. Assume that the product selling price is $50 per unit. Calculate the EBDAT breakeven point in
terms of the number of units that will have to be sold next year
5 (A)
Survival breakeven = CFC/(1-VCRR) = (60000+60000+10000)/(1-0.6) = $325000
5 (B)
Survival breakeven (units) = $325000/$50 = 6500 units
6. [Statement of Cash Flows and Cash Burn or Build] Cindy and Robert (Rob) Castillo founded the Castillo
Products Company in 2008. The company manufactures components for personal decision assistant
products and for other handheld electronic products. Year 2009 proved to be a test of the Castillo
Products Company’s ability to survive. However, sales increased rapidly in 2010, and the firm reported a
net income after taxes of $75,000. Depreciation expenses were $40,000 in 2010. Following are the
Castillo Products Company’s balance sheets for 2009 and 2010.
A. Calculate Castillo’s cash flow from operating activities for 2010.
B. Calculate Castillo’s cash flow from investing activities for 2010.
C. Calculate Castillo’s cash flow from financing activities for 2010.
D. Prepare a formal statement of cash flows for 2010 and identify the major cash inflows and outflows
that were generated by the Castillo Products Company.
E. Use your calculation results from Parts A and B to determine whether Castillo was building or burning
cash during 2010 and indicate the dollar amount of the cash build or burn.
F. If Castillo had a net cash burn from operating and investing activities in 2010, divide the amount of
burn by 12 to calculate an average monthly burn amount. If the 2011 monthly cash burn continues at
the 2010 rate, indicate how long in months it will be before the firm runs out of cash if there are no
changes in financing activities.
G. Estimate Castillo’s EBDAT breakeven in terms of survival revenues if interest expenses had remained
at the 2009 level ($45,000) in 2010
H. Estimate the dollar amount of survival revenues actually needed by the Castillo Products Company to
reach EBDAT breakeven in 2010, given that more debt was obtained and interest expenses increased to
$60,000.
Statement of Cash Flow
Cash flow from operating
activities:
Net income 75000
Depreciation 40000
Increase in Account Receivables (80000)
Increase in Account payables 30000
Increase in accruals 20000
Increase in Inventories (100000)
Net cash flow from operating (15000)
activities
Cash flow from investing
activities:
Increase in gross assets (90000)
Net cash flow from investing (90000)
activities
Cash flow from financing
activities:
Increase in bank loan 10000
Increase in long term loan 100000
Dividends payout (75000-40000) = (35000)
75000
Beginning cash balance 50000
Ending cash balance 20000
1 (A) (B) (C) (D)
1 (E)
Cash burn = Operating + Investing activities = (15000) + (90000) = -$105000
Using formula
Cash burn
= Income based operating, interest and tax expenses + Increase in inventories – Changes in payables and
accruals + CAPEX
= 900000 + 150000 + 250000 + 60000 + 25000 + 100000 – 50000 + 90000
= 1525000
Cash build
= Net sales – Increase in receivables
= 1500000 – 80000
= 1420000
Net cash burn = 152500 – 142000 = 105000
1 (F)
$105000/12 = $8750
$20000/$8750 = 2.29 months
1 (G)
Survival Breakeven/ EBDAT Breakeven = CFC/(1-VCRR) = 150000+250000+45000/(1-0.6) = $1112500
1 (H)
Survival Breakeven / EBDAT Breakeven= 150000+250000+60000/(1-0.6) = $1150000