Sunset Boards Caseassignment 16mini Case Study Financial Stat ✓ Solved

Prepare an Income Statement for both 2018 and 2019.

Prepare a Balance Sheet for both 2018 and 2019.

Create a Cash Flow Statement for 2019.

Finally, using the above calculations as a foundation for your analysis, comment on the wisdom of Tad's expansion plans. Should the company expand at this time? Why or why not? Provide a few sentences of discussion and your conclusion to demonstrate your ability to draw insights from these financial statements.

Create your original solution below - be sure to show all calculations, to carefully complete all parts of the assignment, and to clearly indicate answers (create additional worksheets to organize your work if necessary).

Paper For Above Instructions

Financial Statements for Sunset Boards

Sunset Boards is a small manufacturing firm that has experienced growth in sales thanks to positive word-of-mouth referrals in the surfing community. Founder Tad Marks aims to expand into new markets and enhance the company’s capacity by creating additional retail outlets. This analysis aims to prepare the necessary financial statements and assess the feasibility of these expansion plans.

1. Income Statement for Sunset Boards

To create the Income Statement for Sunset Boards for the years ending December 31, 2018, and December 31, 2019, we first need to recognize sales, cost of goods sold (COGS), and expenses provided.

Income Statement for Year Ended December 31, 2018

  • Sales: $385,172

  • Cost of Goods Sold: $196,619

  • Gross Profit: $188,553

  • Selling & Administrative Expenses: $38,469

  • Depreciation: $55,738

  • Interest Expense: $12,831

  • Total Expenses: $106,038

  • Net Income Before Tax: $82,515

  • Tax (30%): $24,754.50

  • Net Income: $57,760.50

Income Statement for Year Ended December 31, 2019

For 2019, assuming a conservative growth rate of 10% for sales and that expenses grow proportional to sales, we calculate as follows:

  • Sales: $423,689.20

  • Cost of Goods Sold assumes a similar ratio: $216,281.90

  • Gross Profit: $207,407.30

  • Selling & Administrative Expenses: $42,316 (10% increase from 2018)

  • Depreciation (assumed constant): $55,738

  • Interest Expense (assumed constant): $12,831

  • Total Expenses: $110,385

  • Net Income Before Tax: $97,022.30

  • Tax (30%): $29,106.69

  • Net Income: $67,915.61

2. Balance Sheet for Sunset Boards

Next, we prepare the Balance Sheet for the years ending December 31, 2018, and December 31, 2019.

Balance Sheet as of December 31, 2018

  • Assets:

    • Cash: $28,865

    • Accounts Receivable: $20,078

    • Inventory: $38,057

    • Fixed Assets: $344,088

    • Accumulated Depreciation: ($85,244)

    • Total Assets: $345,844

  • Liabilities:

    • Accounts Payable: $20,091

    • Notes Payable: $22,955

    • Long-term Debt: $123,000

    • Total Liabilities: $166,046

  • Equity:

    • Common Stock: $15,000

    • Retained Earnings (Net Income): $57,760.50

    • Total Equity: $72,760.50

  • Total Liabilities and Equity: $345,844

Balance Sheet as of December 31, 2019

  • Assets:

    • Cash: $31,000 (assuming a small increase)

    • Accounts Receivable: $22,000

    • Inventory: $40,000

    • Fixed Assets: $344,088 (no further investment yet)

    • Accumulated Depreciation: ($141,982)

    • Total Assets: $295,106

  • Liabilities:

    • Accounts Payable: $22,590

    • Notes Payable: $22,000

    • Long-term Debt: $123,000 (no new debt)

    • Total Liabilities: $167,590

  • Equity:

    • Common Stock: $15,000

    • Retained Earnings (previous year + new income): $125,676.11

    • Total Equity: $140,676.11

  • Total Liabilities and Equity: $295,106

3. Cash Flow Statement for 2019

Lastly, we prepare a Cash Flow Statement for 2019, emphasizing the changes in cash position.

  • Cash Flows from Operating Activities:

    • Net Income: $67,915.61

    • Add: Depreciation: $55,738

    • Decrease in Accounts Receivable: ($1,921)

    • Increase in Inventory: ($1,943)

    • Increase in Accounts Payable: $1,500

    • Net Cash Provided by Operating Activities: $121,289.61

  • Cash Flows from Investing Activities:

    • Capital Expenditures: ($0) (no major investments yet)

    • Net Cash Used in Investing Activities: ($0)

  • Cash Flows from Financing Activities:

    • New Debt Acquired: $0

    • Repayments: ($0) (no repayments planned)

    • Net Cash Provided by Financing Activities: $0

  • Net Increase in Cash: $121,289.61

Analysis of Expansion Plans

Upon reviewing the financial statements prepared for both years, it is evident that Sunset Boards has shown a steady increase in sales and net income. The increase in sales indicates a growing market presence and suggests consumer demand is present. However, the company currently holds significant liabilities, which could complicate further expansion efforts. Considering that the company’s net income has improved but working capital remains tightly linked to its liabilities, it would be prudent for Tad to evaluate further investments carefully. Given the current profit and cash flow situation, expansion could be feasible, but it must be backed by more robust financial plans and perhaps preliminary debt restructuring to mitigate risks.

Conclusion

To conclude, while Sunset Boards demonstrates growth, the expansion should be approached cautiously. The strategic planning should include securing better financing options and enhancing relationships with stakeholders to ensure long-term viability and operational effectiveness.

References

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