Generally Accepted free essay sample

Prepare the Statement of Retained Earnings for the year (5 marks) TORONTO SERVICES INC STATEMENT OF RETAINED EARNINGS December 31, 2008 Opening Retained Earnings50,000 Add: Net Income93,000 143,000 Less: Dividends (50,000) Ending Retained Earnings93,000 c. Prepare the Balance Sheet at December 31, 2008 (7 marks) TORONTO SERVICES INC BALANCE SHEET December 31, 2008 ASSETS Cash10,000 Accounts Recievable25,000 Supplies3,000 Furniture20,000 Building140,000 Land98,000 TOTAL ASSETS296,000 LIABILITIES Accounts Payable21,000 Salary Payable12,000 Note Payable95,000 TOTAL LIABILITIES128,000 SHAREHOLDERS EQUITY Share Capital75,000 Retained Earnings93,000 TOTAL SHAREHOLDERS EQUITY168,000 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY296,000 d. Based on the financial statements prepared, answer the following questions: 1. Was Toronto Service Inc. profitable during 2008? If so by how much? (2 marks) Toronto Services Inc was profitable by $93,000 2. Did Retained Earnings increase or decrease? What is the amount of the change? (2 marks) Retained Earnings increased by $43,000 3. Which is the greater total, liabilities or total equity? Who owns more of the company’s assets, the creditors or the shareholders? (4 marks) Total equity if greater than total liabilities. Therefore, since the equity, which is the shareholders share of the company assets is greater than the liabilites, which are the creditors share of the assets, the companys assets are owned more by the shareholders than the creditors. Question 2 15 marks (3 marks each) a. If you could pick a single source of cash for your business, what would it be? Why? I would chose revenue as my source of cash because it does not need to be paid back. It increases the income of the company and the cash increases its financial position by increasing assets, while not increasing the debt to any creditor and without giving away any share capital. Liabilites will need to be paid back, most likely with interest, while investors will later have a share of dividends. Revenue, on the other hand, will have corresponding expenses but will not accrue interest nor have a long term hold on the companys earnings. Some expenditures may be required, but for a higher return through the revenue. b. How can a business earn large profits but have a small balance in Retained Earnings? Businesses that pay out a lot of dividends will have a smaller retained earnings balance even if they have higher income. This means that instead of the earnings remaining within the company, they are paid out to the shareholders and taken off the financial statements instead. The company looses all claim to the money once the dividend is paid. c. How can a business lose money for many years and still have plenty cash? A business can lose money for years but if they have a high cash balance to begin with. That way, even with the company losing money there will be sufficient funds within the company. Also, if investors keep buying the companys equity with cash, the companys cash balance may be higher. Another possibility is that they have high liabilites with amounts payable to third parties which they have not paid. This includes accounts payable, notes payable, etc. As long as the dues are not paid, the cash balance will not decrease even if the company is in a loss. d. Give two reasons why a business can be profitable for many years and still have a cash shortage? If the company has a business where large amounts of cash investments are required in order to earn the revenue, they will have a shortage of cash even if they are profitable. Also, if they keep expanding as they get the money from the profit, there will always be a cash shortage since they do not keep the excess cash within the company. Also, if the company pays high amounts of dividends along with the high profit, the excess cash that comes with the profits will be going out as dividends and returning the company to its previous cash position. . 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. The remiaing 20,000 can be financed by acquiring a loan (increasing liability) though a note payable. The other option is to sell shares of the company, by letting others invest into the company. These investores will put money into the company in return for a share of the equity. PART II TOTAL MARKS 40 MARKS Janice Colangelo heads the Training Centre of the large HR Consulting firm EMT 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. Training Revenue (200 x 20 x $300)|$1,200,000| || Less Expenses:|| || Trainer costs (200 x 2 x $1500)|600,000| || Manager’s Salary|120,000| || Training officer|90,000| || Administrative staff|80,000| || Utilities/phone costs|20,000| || Manuals for participants|120,000| || Advertising costs|125,000| || Postage other miscellaneous costs|9,450| || Total expenses|$ 1,164,450| || || || Income from operations|$35,550| || Common Allocated costs (10% of revenue)|120,000| || Net Income or (loss)|$(84,450)| || Required: 1. a. Classify each of the costs as variable or fixed. (5 marks) Fixed: Managers Salary, Training officer, Administrative staff, utilities/phone cots, advertising costs Variable: Trainer costs, manuals for participants, postage other miscellanous, common allocated costs 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) The company overall will loose 75,550 of profit. This is due to the fact that along with the 35550 profit from the operations that it will lose, the company will continue to employ one of the two the administrative employees costing 40,000. Even though the above statement shows the department being at a loss, there is a 35,550 profit from the operations and the loss only occurs as a result of the common costs of 120,000 being allocated to the department. These costs are common and will still incur even if the department is closed. It will just get allocated to other departments, further lowering thier income instead. The company will be loosing money and should not close the department. 2. Given the allocated costs at 10% of revenue, calculate the number of workshops that must be offered to break-even. (10 marks) Revenue per workshop: 20*300= 6000 let x be the number of workshops required 6000x= (1500*2)x + 120000+90000+80000+20000+(120000/200)*x + 125000+9450+(. 1*6000x) 1800x=444450 =247 workshops are required to breakeven 3. Re-calculate #2 above, assuming Janice can re-negotiate the part-time trainers’ cost to $1000 per workshop. (10 marks) Revenue per workshop: 20*300= 6000 let x be the number of workshops required 6000x= (1000*2)x + 120000+90000+80000+20000+(120000/200)*x + 125000+9450+(. 1*6000x) 2800x=444450 x=159 workshops are required to breakeven 4. With the increase in globalization and companies outsourcing many j obs, Janice thinks that, in addition to management training, the Training Centre should offer â€Å"second career† training. Janice feels that this will add 100 more workshops with an average enrollment of 15 participants at a cost of $200 each. The rate per participant is based on the fact that a non-profit organization has offered its facilities, free of charge, to run the workshops. What effect will this have on the Training Centre profit? Note: The trainers will be paid $1000 per workshop. The only other additional cost will bemanuals at $15 each. revenue= 100*15*200=300,000 Cost: 1000*100=100,000 Income= 200,000 The training centre profit will increase by 200,000.