Financial Accounting
Financial Accounting
Financial Accounting
Name of the Student
Institution Affiliation
Date
Part one
The Statement of Cash Flows
Matthew’s Models Cash flow statement for financial period ending 2017
Amount
Amount
Cash from operations
Net income
$ 82,000.00
Add: Non cash item
Depreciation
$ 20,000.00
Loss on assets
$ 2,500.00
$ 104,500.00
Cash from changing operating activities
Add Increase in short term liabilities
$ 43,000.00
Less Operating expenses
$ -106,200.00
less Increase in current asset
$ -14,400.00
$ -77,600.00
Cash generated from operations
Less tax expenses
$ -29,300.00
Total Cash from operations
$ -29,300.00
Cash from investing activities
Purchase of assets
$ -2,500.00
$ -2,500.00
Cash balance
Cash from financing activities
Decrease in long term liabilities
$ -12,000.00
Payment of loan
$ -50,000.00
Cash capital injected
$ 28,000.00
Other financing sources
$ 4,000.00
$ -30,000.00
Cash and cash equivalent balance
$ -34,900.00
Cash at the beginning
$ 38,500.00
Cash at the end
$ 3,600.00
The financial performance of Matthew’s Models
The financial performance of the Mathews model has not produced an admirable result. The cash flow statement shows a negative cash balance. This is an indication that liquidity problems are likely to occur when the model is implemented. That is, the company will not be able to cover short-term expenses and long-term expenses. This indicates that the model should consider a line of business that produces more cash flow so that the company can be self-sustaining.
Justification for Nick Loan
The company’s financial situation does not support taking on more debt. The model result shows that the chosen line of business is not able to produce enough cash flow to fund internal operating costs. This shows that additional liabilities are a drain on the company’s resources, meaning that the company could become insolvent if it does not venture into a line of business that can generate more cash. Therefore, I would recommend that the company not take out any more loans until it finds a more reliable line of business that can generate enough cash to pay off the debts.
Approve the loan for Matt
If I’m Matt’s, I can’t approve the loan for Nick. This is because he may not be able to repay the loan depending on the amount of cash generation. Therefore, unless Nick has ventured into a project with a more attractive return that will generate enough cash, he should continue with the business until he begins to generate the resources that can support the loan. This will help avoid a situation of loan default that can affect the business, especially if the business assets are taken to repay the loan.
Part Two Cost Volume Profit Analysis
The Contribution Margin ratio and the break-even point in skateboards.
Contribution margin =selling price -cost per unit
=40-24
Contribution margin = 16
Breakeven point =fixed expenses/ contribution margin
=480,000/16
B.E. P= 30,000
The new Contribution margin ratio and the new break-even point in skateboard
Variable cost = 24+2=26
Sp=40
Contribution margin= 40-26=14
Break-even point =fixed asset/contribution margin
=4880,000/14
B.E. P= 34,286
The number of skateboards to earn 160,000.
Amount of unit that gives 160,000
= (FC+ Income)/contribution margin
= (480,000+160,000)/14
=640,000/14
Units=45,714
The selling price per skateboard must it charge next year to cover the increased labor costs.
If 34286=14
Therefore, 30,000
= (14*30000)/34,286=12.25
The price will be raised by 12.25
Therefore, the price price =40+12.25
The price =52.25
The company’s new Contribution Margin ratio and new break-even point in skateboards
Variable cost= 60/100*24
=14.4
Contribution Margin= 40-14.4
Contribution margin=25.6
Increase in fixed cost= 190/100*480,000
Fixed cost= 912,000
B.E. P= Fixed cost /contribution margin
B.E.P =912,000/25.6
B.E.=35,625 units
The same net operating income, $160,000, as last year
Amount of unit that gives 160,000
= (FC+ Income)/contribution margin
Number of skateboard= (912,000+160,000)/25.6
Number of skateboards= 41,875
The contribution format income statement.
Contribution format income statement.
Particulars
Amount
Amount
Sales of 40,000 skateboards*40
$ 1,600,000.00
Variable cost 40,000*14.4
$ 576,000.00
Contribution Margin
$ 1,024,000.00
Fixed cost
$ 912,000.00
Net operating profit
$ 1,936,000.00
Recommendation
I would recommend that the management to implement the new plant project. The new plant will increase the cash as it has more income generating as compared to the initial plant. This will ensure that the cost of the business will be catered for.
References Annalisa , C., Tor , E., & Dario , P. (2013). High‐Performance Management Practices and Employee Outcomes in Denmark. Scottish Journal of Political Economy, 60(3), 232-266. Gary , J. C., & Dennis , F. M. (2013). Have CPAs Captured State Accountancy Boards? Accounting and the Public Interest, 13(1), 85-104.