Assume that the first six months of 2021 have passed, and the Board requested that their accountant prepare an income statement for the first six months of 2021 showing how actual performance compared to budgeted data. Assume the analysis presented in Exhibit 2 was provided to the Board by the accountant. Hanson incurs fixed costs uniformly throughout the year.

EXHIBIT 2 BUDGET ANALYSIS FOR THE FIRST SIX MONTHS ENDED JUNE 30, 2021 Budget Actual Variance Sales units 445,000 460,000 Sales $ 1,824,500 $ 1,863,000 $38,500 Variable costs $ 694,200 $ 690,000 $ 4,200 Contribution margin $ 1,130,300 $ 1,173,000 $42,700 Fixed costs (6 months) $ 1,052,960 $ 1,051,600 $ 1,360 Net Income $ 77,340 $ 121,400 $44,060

3.A. Total actual net income is substantially higher than budgeted net income. Based on the information provided, analyze the operations for the six months ended June 30, 2021, explaining in detail the causes of the difference between budgeted and actual net income. Every significant factor should be included in your analysis. 3.B. A Board member observed that a profit of $121,400 for half of the year would mean an annual profit of $121,400*2 or $242,800. Assuming Hanson can attain but not exceed the target volume of 890,000 units, and that revenue and cost forecasts for all of 2021 should be based on the actual experience during the first half of 2021, prepare a detailed response to a Board member who wants to know if the Board should feel satisfied that they are likely to come close to achieving their goal of an annual target profit of $250,000.

Preface This solved case is the culmination of the work undertaken in this module. We are now ready to focus on how to take a simple business situation and construct the financial component of a business plan. Nibelungen Rings has a very simple business model. They sell costume jewelry for an average $4 per item. They purchase items at average cost of $2 per item. Cash from sales made by Nibelungen Rings is collected over a three-month period. Merchandise has to be purchased in advance based on forecasted sales. In addition, the company has prepaid insurance, depreciation, and a very specific arrangement with their landlord for rent. By keeping the business model very simple, this annotated, solved case provides an opportunity to focus on underlying accounting relationships which can be generalized to all organizations. Like any well-run organization (and household?), Nibelungen prepares a forecast. In this case, the forecasting model includes a balance sheet, an income statement, and a cash flow statement. Nibelungen Rings requires a financial plan for the month of January 2021. You have been provided with a correct solution for this case. You have also been provided with annotations that explain the reasoning behind the analyses in the solution. You can attempt this solved case without looking at the solution and then consult the solution to see how well you did. Or, you can work through the case while simultaneously consulting the solution. Whatever approach you choose, the objective is the same––use this solved case as a vehicle for deepening your understanding of financial modeling and forecasting. It is important to learn how to proceed methodically in the face of uncertainty and ambiguity. The graded Module Submission for this module involves completing the Nibelungen Rings, B Case which builds upon this A Case and extends the forecast one month through February 2021. The purpose of the A Case is to provide a foundation. Without mastering the A Case, it is highly unlikely that attempts to complete the B Case will be successful. It is important to allocate time and energy for reviewing the details of the A Case; and it is hard to overestimate the learning value associated with a careful review of the A Case. The B Case is an individual/group, graded assignment. Nibelungen Rings – A Case Nibelungen Rings sells inexpensive western style jewelry to retail stores. Sales are forecasted at an average selling price of $4 per unit. All sales are on credit. Experience indicates that 40% of current sales is collected in the current month of sale, 40% in the next month, and 20% in the month thereafter. Bad debts are negligible and can be ignored. The company pays an average of $2 for each piece of jewelry that is sells. They have determined that their inventory level at the end of any given month should equal 120% of the next month's forecasted sales in units (e.g., if they expect to sell 5,000 units of jewelry in January for total sales of $20,000, then they BUAD 5107: Module 2 want to have 120%*5,000 or 6,000 units on hand as of January 1st). Their inventory requirements dictate the purchases needed during any given month. Purchases of inventory made in one month are all on account and are paid in full during the following month. Monthly expenses are forecasted as follows: Wages and salaries $11,400 Insurance expired 100 Depreciation 500 Operating expenses 1,600 Rent expense $200 plus 12% of sales made in the current month Nibelungen is a small start-up company and you agreed to accept a position on the Board of Directors. The board met in mid-December of 2020 and discussed their plans regarding dividends. In the past, cash dividends totaling $1,000 have been declared and paid quarterly. The Board expects to declare a dividend in 2021 on January 18th that will be paid in cash on January 25th. All operating expenses are paid as incurred, except insurance, depreciation, and rent. Rent of $200 is paid at the beginning of each month, and the additional 12% of sales is paid quarterly on the tenth of the month following the close of the quarter. The rent payment for the last quarter of 2020 is on due January 10, 2021. The balance sheet prepared as of December 31, 2020 is as follows: ASSETS AS OF DECEMBER 31 LIABILITIES AND EQUITIES AS OF DECEMBER 31 Cash $24,000 Accounts payable Accounts receivable 16,000 (merchandise) $28,000 Inventory 30,000 Rent payable 8,400 Prepaid insurance 1,200 Equipment 15,000 Contributed capital 34,000 less: accum depreciation ( 5,000) Retained earnings 10,800 Total $81,200 Total $81,200 Recent actual sales (October thru December 2020) and forecasted budgeted sales for January 2021 and February 2021 are stated in dollar amounts and presented in the table that follows (note, to ascertain the sales forecast in units simply divide the dollar total by the unit cost of $4). ACTUAL AND FORECASTED SALES _________________________________________________________________ October $30,000 December $20,000 February $60,000 November $20,000 January $50,000 BUAD 5107: Module 2 Required: 1. At the mid-December meeting, other board members asked for your help in preparing a financial plan for the month of January 2021. The forecast for January 2021 is based on projections and past experience. Your financial plan should include a forecasted balance sheet as of January 31, 2021, a forecasted income statement for the month ended January 31, 2021, and a forecasted cash flow statement for the month ended January 31, 2021. You have been provided with a Workbook that includes four tabs. The first tab is the most important. This is the spreadsheet used to record the economic events. The second tab in the Workbook is for the spreadsheet that creates the balance sheet. This spreadsheet is programmed to reflect the fact that the numbers for the balance sheet are derived from the totals calculated in the first tab; and the two spreadsheets can be linked by formulae. Thus, after the template and the links are established, no additional effort is required to prepare the balance sheet. The third tab (the income statement) and the fourth tab (the cash flow statement) both require that you extract the appropriate information from the spreadsheet you prepared in the first tab. It is normal to “not quite know where to start.” It is also normal when you are just getting started to capture some of the major points and miss some of the major points. This is how we learn. Seldom are the professional challenges we face crystal clear on first consideration. Begin with setting up a spreadsheet in the first tab to analyze the economic events associated with the month of January 2021. This case is similar to the Pat Ferguson – Consultant, Cases. Enter as many rows in the spreadsheet as you can based on the facts provided. Remember that each row needs to “balance” to preserve the balance of the accounts. Before proceeding to prepare the income and cash flow statements, compare your analysis to the solution provided and consult the annotations for additional explanations. When you are in agreement regarding the “transactions” spreadsheet in the first tab, prepare a forecasted income statement for the month ended January 31, 2021; and a forecasted cash flow statement for the month ended January 31, 2021. Then compare your balance sheet and cash flow statement to the solution provided. 2. Review the solution and the annotations provided until you are satisfied you understand how the financial model was built. 3. Proceed to the Nibelungen Rings, B Case and refer back to the Nibelungen Rings, A Case as needed.

1. In the first tab of the Workbook labeled "Transactions," complete the spreadsheet by recording the economic events forecasted for the month of February 2021 in the section provided.
2. In the second tab of the Workbook labeled "Balance Sheet," review the balance sheet that was created using the column totals in the final row of the spreadsheet. Make certain this statement is linked to your "Transactions" spreadsheet, thus no additional effort is required to create the Balance Sheet as of February 28, 2021.
3. In the third tab of the Workbook labeled "Income Statement," prepare in good form an income statement for the month ended February 28, 2021.
4. In the fourth tab of the Workbook labeled "Cash Flow Statement," prepare in good form a cash flow statement for the month ended February 28, 2021.
5. Submit the completed Workbook.