Attached in one of the documents is the recommendation, however, financial ratios are missing that analyze the company's, capital structure, liquidity and future prospects. eg. current ratio and debt ratio.

Please include these ratios and an analysis of what they mean for the company based on the questions asked.

Question:

Using the financial statements generated by theChemalite, Inc.(Wilson, 2008)case analyze the capital structure, liquidity, and future prospects of theChemalitecompany.

• What are some of the reasons the company should continue to operate?
• What are some of the arguments for shutting it down?
• Which would you recommend?

Please use ratios that best answer these questions.

Chemalite, Inc. Transaction Analysis Transaction Beginning balance Patents(beginning balance) Legal fees Purchase of Machinery Purchase of inventory Interim Transactions Protoypes Sales Purchase of inventory Advertising Manufacturing costs Labour costs Purchase of machinery Borrowed loan Re-paid loan Interest on loan Depreciation Amortization Cost of goods Total of Transactions Cash Accts Rec - Total 375,000 125,000 (7,500) - 492,500 ### 754,500 ### (22,500) (350,000) (80,000) ### ### (750) (10,625) (25,000) (195,000) 539,375 - - ### (7,500) (62,500) (75,000) - ### ### 75,000 62,500 - - ### 125,000 ### ### ### 230,000 (23,750) 685,000 (175,000) (22,500) (350,000) (80,000) (150,000) 50,000 (50,000) (750) 113,000 - 75,000 62,500 - 125,000 - ### - ### ### 69,500 - 175,000 ### ### ### ### 150,000 69,500 ### ### ### (195,000) 55,000 212,500 - Patent 375,000 Chemalite, Inc. Income Statement For Year Ended December 31, 2003 Revenues Expenses: Legal fees Prototype Advertising Manufacturing and Salaries Interest Cost of Goods Sold Amortization Depreciation Total Expense Net Income Assets Inventory Machinery Accum Depr - (10,625) (10,625) ### ### (25,000) ### 100,000 Chemalite, Inc. Balance Sheet December 31, 2003 754,500 7,500 23,750 22,500 430,000 750 195,000 25,000 10,625 (715,125) 39,375 Notes Payable - 50,000 (50,000) - Liabilities + Equity Common Stock Revenues 375,000 125,000 ### ### ### 500,000 - Expenses (7,500) (7,500) (23,750) ### ### ### ### ### 754,500 - (22,500) (350,000) (80,000) - ### ### ### ### 500,000 754,500 (750) (10,625) (25,000) (195,000) (715,125) Chemalite, Inc. Statement of Cash Flows For Year Ended December 31, 2003 Cash Accounts Rec Inventory Equipment (net) Patents (net) Total Assets 113,000 69,500 55,000 201,875 100,000 539,375 Notes Pay Common Stock Retained Earnings Total Liab + Equity 500,000 39,375 539,375 Operating Cash Flows Net Income Add: Deprec./Amortiz. Less: Incr in Accts. Rec. Less: Incr in Inventory Total Operating Activities Investing Cash Flows Purchase Equipment 39,375 35,625 (69,500) (55,000) (49,500) (212,500) Financing Cash Flows Sale of Stock Change in Cash 375,000 113,000 Beginning Cash Change in Cash Ending Cash 113,000 113,000 Total 375,000 125,000 (7,500) 492,500 (23,750) 754,500 (22,500) (350,000) (80,000) ### ### (750) (10,625) (25,000) (195,000) 539,375 Chemalite, Inc. Transaction Analysis Transaction Cash Accts Rec Outstanding shares (start of year) Beginning balance 375,000 Patents(beginning balance) Legal fees Purchase of Machinery Purchase of inventory Prototypes Interim Transactions Sales Purchase of inventory Advertising Manufacturing costs Labour costs Purchase of machinery Interest on loan Depreciation Amortization Cost of goods Total of Transactions 375,000 685,000 1,060,000 Chemalite, Inc. Trial Balance For Year Ended December 31, 2003 Cash 113,000 Patents 100,000 Preoperation Costs 7,500 69,500 69,500 Assets Inventory Machinery Accum Depr ### Total 375,000 125,000 62,500 75,000 - - ### ### ### ### ### ### 75,000 ### 62,500 - - 75,000 62,500 - 125,000 637,500 - 500,000 - ### 754,500 175,000 150,000 1,717,000 - ### ### ### ### ### ### ### ### ### 500,000 150,000 212,500 - Patent ### 125,000 ### ### ### ### 175,000 ### ### ### ### ### ### ### ### 250,000 - Notes Payable Liabilities Common Stock 500,000 ### - ### - ### ### ### ### ### ### 125,000 Machinery Inventory Prototypes Accounts Receivables Advertising Expenses Direct Labour and overhead e Interest expenses Depreciation Expenses Amortization Expenses Supplies Expenses Common Stock Sales Accumulated Depreciation 212,500 55,000 23,750 69,500 22,500 430,000 750 10,625 25,000 195,000 1,265,125 500,000 754,500 10,625 1,265,125 Chemalite, Inc. Income Statement For Year Ended December 31, 2003 Revenues Expenses: Legal fees Prototype Advertising Manufacturing and Salaries Interest Cost of Goods Sold Amortization Depreciation Total Expense Net Income 754,500 7,500 23,750 22,500 430,000 750 195,000 25,000 10,625 (715,125) 39,375 Chemalite, Inc. ies + Equity Revenues - Expenses - Total 500,000 - - 7,500 23,750 7,500 23,750 - 31,250 31,250 22,500 350,000 80,000 750 10,625 25,000 195,000 715,125 754,500 22,500 350,000 80,000 750 10,625 25,000 195,000 1,469,625 754,500 754,500 General Journal Date 2003 2-Jan 31-Dec 31-Dec Explanation Debit Patents 125,000 Common stock (being exchange of patents for shares.) Depreciation 10,625 Accumulated depriciation Amortization 25,000 Accumulated amortization Credit 125,000 10,625 25,000 CASH PAYMENTS JOURNAL DATE 2003 15-Jan Other POST REF Accounts ACCOUNT DEBITED DR. Preoperation costs 15-Jun Machinery 24-Jun Inventory Jul Prototypes Jul - Dec 2003 Direct costs Machinery Interest Advertising Inventory Page 1 Accounts Cash Payable CR. DR. 7500 7500 62500 62500 75000 75000 23,750 23,750.00 430,000 430,000.00 150,000 150,000.00 750 750.00 22,500 22,500.00 175,000 175,000.00 947,000 947,000 CASH RECEIPTS JOURNAL Account credited 2-Jan common stock Jul - Dec 2003 Sales POST REF Other CR Page 1 Sales Store Sales CR. 375,000 685,000 Cash DR 375,000 685,000 Sales journal DATE ACCOUNT DEBITED jul-dec 200Auto spares POST REF Accounts Rec DR sales cr 69500.00 69500.00 Patent Date 2003 2-Jan Jul - Dec 2003 Common Stock Date 2003 2-Jan 2-Jan Explanation Debit Common stock Amortization 125,000 Explanation Debit Patents Cash Credit Balance 25,000 125,000 100,000 Credit Balance 125,000 125,000 375,000 500,000 Pre-operation costs Date 2003 15-Jan Machinery Date 2003 15-Jun Jul - Dec 2003 Inventory Date 2003 24-Jun Jul - Dec 2003 Explanation Debit Cash 7,500 Explanation Debit Cash Cash 62,500 150,000 Explanation Debit Cash Cash 75,000 175,000 Cost of goods (250,000 - 55,000) Prototypes Date Explanation Credit Balance 7,500 Credit Balance 62,500 212,500 Credit Balance 75,000 250,000 195,000 55,000 Debit Credit Balance 2003 Jul Cash 23,750 23,750 Explanation Sales Debit 69,500 Credit Balance 69,500 Explanation Cash Debit 22,500 Credit Balance 22,500 Explanation Cash Debit Credit 430,000 Balance 430,000 Debit 750 Credit Balance 750 Debit Credit Balance Accounts receivable Date Jul - Dec 2003 Advertising expense Date Jul - Dec 2003 Direct labor, salaries, overheads and other expenses Date Jul - Dec 2003 Interest expense Date Explanation Jul - Dec 2003 Cash Depreciation expense Date Explanation Jul - Dec 2003 Accumulated depreciation10,625 Machinery Accumulated depreciation Machinery Date Jul - Dec 2003 10,625 Explanation Depreciation expense Debit Credit 10,625 Balance 10,625 Amortization expense Date Jul - Dec 2003 Explanation Patent Debit 25,000 Supplies expense Date Explanation Jul - Dec 2003 Inventory Sales Date Jul - Dec 2003 Date 2003 2-Jan 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Explanation Accounts receivable Cash Cash Explanation Common stock Pre-operation costs Machinery Inventory Prototypes Sales Inventory Advertising expenses Credit Balance 25,000 Debit Credit 195,000 Balance 195,000 Debit Credit Balance 69,500 69,500 685,000 754,500 Debit Credit Balance 375,000 375,000 7,500 367,500 62,500 305,000 75,000 230,000 23,750 206,250 685,000 891,250 175,000 716,250 22,500 693,750 Direct labor, salaries, overheads and other expenses 430,000 263,750 Machinery Interest expense 150,000 113,750 750.00 113,000 Reasons why the company should continue to operate Chemalite Inc. should continue to operate despite the decrease of the cash reserves held by the firm duri year. From the financial statements developed, the company was able to make a profit as shown from th statement of income. For the year 2003, the company was able to make sales of the chemalite of $754,5 After deducting the operating and other expenses, the company reported an income of $39,375 after pay of the interest expense. This means that the company was profitable for the year 2003 and should theref continue in operation. The firm can take advantage of the patents and the great innovation in the produc the chemalite to double its profits before other firms identify other alternative ways of making the produ Therefore the firm should continue operating (Lafrey & Charan, 2008). The shareholder's wealth has also been maximized. The investors of the company are usually contented company management are able to take into consideration the maximization and increasing the value of t shareholder's investment (Wheeler & Sillanpaa, 1997). From the current year, the company reported pro the year. The net income generated from the operations of the firm improved the shareholder's value sin the shareholder's equity improved as can be seen from the statement of the changes in the shareholder's from $500,000 to $539,375 at the end of the year. This shows that the firm is progressing towards the rig direction and should therefore continue to operate. Every organization strives to maintain a positive cash balance such that the firm is able to meet its matu short term obligations and expenses and as well as being able to remain solvent such that the firm can h agreements and covenants with lenders, creditors, suppliers. Chemalite has a positive cash balance at th the year as reported in the statement of cash flows. From the financial statement, at the end of the year, t ending balance of cash flows was $113,000. This means that the company has sufficient cash balance to any short term obligations. Therefore, this implies that the liquidity and solvency of the firm is better an should hence continue operating since the company is not facing any financial difficulties. This can be demonstrated when the company was able to borrow funds from the lender and the company repaid the principal and interest due before the end of the year. Any firm with a strong financial muscles is likely to succeed in its future operations and thus Chemalite, Inc. should continue being in business. Reasons for shutting down the company The company is facing risks of poor management. Benett Alexander - the inventor of the Chemalite pro idea, took over the active management of the Chemalite Inc. Company. Despite Alexander being a chem engineer, he is not an expert in the business world. He lacks the business management expertise and skil manage the business. He doesn't even understand simple book keeping, financial reporting or financial management concepts. This can translate to poor business decision making which may expose the firm t severe losses. As such, the company should be shut down so as to avoid the risk of the firm running into as a result of poor management. The losses may lead to loss of the shareholder's investments and legal s arising from dishonored contracts with lenders of funds and suppliers (Bateman & Snell, 2013). Chemal should therefore be closed down indefinitely till proper management with business expertise is deployed Recommendation The company should continue operating. Considering the good financial performance of the company ra from the profits generated for the year 2003 and the positive net cash flows generated by the company f year, the company can grow and expand significantly if it continues its operations. The issue of manage problems can be fixed by recruiting a business knowledgeable personnel to run the company. References Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman s held by the firm during the rofit as shown from the he chemalite of $754,500. me of $39,375 after payment 2003 and should therefore novation in the production of ys of making the product. y are usually contented if the ncreasing the value of the company reported profits for shareholder's value since even es in the shareholder's equity gressing towards the right s able to meet its maturing uch that the firm can honor its tive cash balance at the end of at the end of the year, the ficient cash balance to meet of the firm is better and ficulties. This can be he company repaid the cial muscles is likely to business. or of the Chemalite production lexander being a chemical ment expertise and skills to reporting or financial may expose the firm to f the firm running into losses nvestments and legal suits & Snell, 2013). Chemalite Inc. ss expertise is deployed. ance of the company ranging ated by the company for the s. The issue of management e company. rwin. ue and profit growth with r maximizing stakeholder rwin. ue and profit growth with r maximizing stakeholder Chemalite, Inc. Transaction Analysis Transaction Cash Accts Rec Outstanding shares (start of year) Beginning balance 375,000 Patents(beginning balance) Legal fees Purchase of Machinery Purchase of inventory Prototypes Interim Transactions Sales Purchase of inventory Advertising Manufacturing costs Labour costs Purchase of machinery Interest on loan Depreciation Amortization Cost of goods Total of Transactions 375,000 685,000 1,060,000 Chemalite, Inc. Trial Balance For Year Ended December 31, 2003 Cash 113,000 Patents 100,000 Preoperation Costs 7,500 Machinery 212,500 69,500 69,500 Assets Inventory Machinery Accum Depr ### Total Notes Payable 375,000 125,000 62,500 75,000 - - ### ### 75,000 ### 62,500 - - 75,000 62,500 - 125,000 637,500 - - - ### - - ### - ### ### ### ### ### ### 125,000 754,500 175,000 150,000 1,717,000 - 150,000 212,500 - Patent ### 125,000 ### ### ### ### 175,000 ### ### ### ### ### ### ### ### 250,000 - Liabili - Inventory Prototypes Accounts Receivables Advertising Expenses Direct Labour and overhead e Interest expenses Depreciation Expenses Amortization Expenses Supplies Expenses Common Stock Sales Accumulated Depreciation 55,000 23,750 69,500 22,500 430,000 750 10,625 25,000 195,000 1,265,125 500,000 754,500 10,625 1,265,125 Chemalite, Inc. Income Statement For Year Ended December 31, 2003 Revenues Expenses: Legal fees Prototype Advertising Manufacturing and Salaries Interest Cost of Goods Sold Amortization Depreciation Total Expense Net Income 754,500 7,500 23,750 22,500 430,000 750 195,000 25,000 10,625 Chemalite, Inc. (715,125) 39,375 Liabilities + Equity Common Stock Revenues Expenses 500,000 ### 500,000 500,000 Total 500,000 - ### ### ### ### 7,500 23,750 7,500 23,750 - 31,250 31,250 22,500 350,000 80,000 750 10,625 25,000 195,000 715,125 754,500 22,500 350,000 80,000 750 10,625 25,000 195,000 1,469,625 754,500 ### ### ### ### ### ### ### ### ### 754,500 General Journal Date 2003 2-Jan Explanation Debit Patents Common stock 125,000 Credit 125,000 (being exchange of patents for shares.) 31-Dec 31-Dec Depreciation Accumulated depriciation Amortization Accumulated amortization 10,625 10,625 25,000 25,000 CASH PAYMENTS JOURNAL DATE 2003 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Other POST REF Accounts ACCOUNT DEBITED DR. Page 1 Accounts Cash Payable CR. DR. 7500 Preoperation costs 7500 Machinery 62500 Inventory 75000 62500 75000 Prototypes 23,750 23,750.00 Direct costs 430,000 430,000.00 Machinery 150,000 150,000.00 750 750.00 22,500 22,500.00 175,000 175,000.00 947,000 947,000 Interest Advertising Inventory CASH RECEIPTS JOURNAL Account credited 2-Jan Jul - Dec 2003 common stock POST REF Other CR Page 1 Sales Store Sales CR. 375,000 Cash DR 375,000 685,000 Sales 685,000 Sales journal DATE ACCOUNT DEBITED jul-dec 200Auto spares POST REF Accounts sales cr Rec DR 69500.00 69500.00 Patent Date 2003 2-Jan Jul - Dec 2003 Explanation Debit Common stock Amortization 125,000 Common Stock Date Explanation 2003 2-Jan Patents 2-Jan Cash Pre-operation costs Date 2003 15-Jan Machinery Date 2003 15-Jun Jul - Dec 2003 Inventory Date 2003 24-Jun Jul - Dec 2003 Prototypes Date 2003 Debit Credit Balance 25,000 125,000 100,000 Credit Balance 125,000 125,000 375,000 500,000 Explanation Debit Cash 7,500 Explanation Debit Cash Cash 62,500 150,000 Explanation Debit Credit Balance 7,500 Credit Balance 62,500 212,500 Credit Balance Cash 75,000 75,000 Cash 175,000 250,000 Cost of goods (250,000 - 195,000 55,000 55,000) Explanation Debit Credit Balance Jul Cash 23,750 23,750 Accounts receivable Date Jul - Dec 2003 Explanation Sales Debit 69,500 Credit Balance 69,500 Advertising expense Date Jul - Dec 2003 Explanation Cash Debit 22,500 Credit Balance 22,500 Explanation Cash Debit Credit 430,000 Balance 430,000 Explanation Cash Debit 750 Credit Balance 750 Explanation Debit Accumulated depreciation10,625 Machinery Credit Balance Explanation Depreciation expense Credit 10,625 Direct labor, salaries, overheads and other expenses Date Jul - Dec 2003 Interest expense Date Jul - Dec 2003 Depreciation expense Date Jul - Dec 2003 Accumulated depreciation Machinery Date Jul - Dec 2003 10,625 Debit Balance 10,625 Amortization expense Date Jul - Dec 2003 Explanation Patent Debit 25,000 Credit Balance 25,000 Explanation Inventory Debit Credit 195,000 Balance 195,000 Supplies expense Date Jul - Dec 2003 Sales Date Jul - Dec 2003 Date 2003 2-Jan 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Explanation Accounts receivable Cash Cash Explanation Common stock Pre-operation costs Machinery Inventory Prototypes Sales Inventory Advertising expenses Debit Credit Balance 69,500 69,500 685,000 754,500 Debit Credit Balance 375,000 375,000 7,500 367,500 62,500 305,000 75,000 230,000 23,750 206,250 685,000 891,250 175,000 716,250 22,500 693,750 Direct labor, salaries, overheads and other expenses 430,000 263,750 Machinery Interest expense 150,000 113,750 750.00 113,000 Reasons why the company should continue to operate Chemalite Inc. should continue to operate despite the decrease of the cash reserves held by the firm duri year. From the financial statements developed ,the company was able to make Gross profit margin of 74 is a very good sign of the company in regard to its ability to cover its operating expenses such as manuf expenses, salaries and wages and legal fees. This high Gross profit margin also indicates a good sign of company's operating efficiency. After deducting the operating and other expenses, the company reported a Net profit margin of 5%.This that in the first year of its operation the company was able to surpass the break even point and actually m profit.The company can take advantage of the patents and the great innovation in the production of the chemalite to double its Net profit margins before other firms identify other alternative ways of making t product. Therefore the firm should continue operating (Lafrey & Charan, 2008). The shareholder's wealth has also been maximized. The investors of the company are usually contented company management are able to take into consideration the maximization and increasing the value of t shareholder's investment (Wheeler & Sillanpaa, 1997). From the current year, the company reported a 7 return on stockholders equity for the year. This positive return on shareholders equity shows that the fir progressing towards the right direction and should therefore continue to operate. Every organization strives to maintain a positive cash balance such that the firm is able to meet its matu short term obligations and expenses and as well as being able to remain solvent such that the firm can h agreements and covenants with lenders, creditors, suppliers. Chemalite has a positive cash flow margin 0f 15% at the end of the year as reported in the financial statements.This means that th company has sufficient cash balance to meet any short term obligations. Therefore, this implies that the liquidity and solvency of the firm is better and should hence continue operating since the company is no any financial difficulties. This can be demonstrated when the company was able to borrow funds from th lender and the company repaid the principal and interest due before the end of the year. Any firm with a financial muscles is likely to succeed in its future operations and thus Chemalite, Inc. should continue b business. Reasons for shutting down the company The company is facing risks of poor management. Benett Alexander - the inventor of the Chemalite pro idea, took over the active management of the Chemalite Inc. Company. Despite Alexander being a chem engineer, he is not an expert in the business world. He lacks the business management expertise and skil manage the business. He doesn't even understand simple book keeping, financial reporting or financial management concepts. This can translate to poor business decision making which may expose the firm t severe losses. As such, the company should be shut down so as to avoid the risk of the firm running into as a result of poor management. The losses may lead to loss of the shareholder's investments and legal s arising from dishonored contracts with lenders of funds and suppliers (Bateman & Snell, 2013). Chemal should therefore be closed down indefinitely till proper management with business expertise is deployed Recommendation The company should continue operating. Considering the good financial performance of the company ra from the positive gross profit margins,return on equity and net profit margins for the year 2003 and the p cash flow margin generated by the company for the year, the company can grow and expand significan continues its operations. The issue of management problems can be fixed by recruiting a business knowledgeable personnel to run the company. References Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman knowledgeable personnel to run the company. References Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman s held by the firm during the oss profit margin of 74%. This penses such as manufacturing dicates a good sign of the RATIO ANALYSIS Gross profit margin=((sales-cost of goods)/sales)*100 74% ofit margin of 5%.This shows en point and actually make the production of the tive ways of making the Net profit margin=(Net income/sales)*100 are usually contented if the creasing the value of the company reported a 7% quity shows that the firm is Return on stockholders equity=(Net income available to common stockh s able to meet its maturing uch that the firm can honor its tive ents.This means that the e, this implies that the nce the company is not facing o borrow funds from the year. Any firm with a strong Inc. should continue being in Cash flow margin Ratio=Cash flows from from operating et sales 15% r of the Chemalite production lexander being a chemical ment expertise and skills to reporting or financial may expose the firm to f the firm running into losses nvestments and legal suits & Snell, 2013). Chemalite Inc. s expertise is deployed. ance of the company ranging he year 2003 and the positive and expand significantly if it uiting a business rwin. ue and profit growth with r maximizing stakeholder 5% 7% rwin. ue and profit growth with r maximizing stakeholder able to common stockholders)/stockholders equity. perating et sales Chemalite, Inc. Transaction Analysis Transaction Cash Accts Rec Outstanding shares (start of year) Beginning balance 375,000 Patents(beginning balance) Legal fees Purchase of Machinery Purchase of inventory Prototypes Interim Transactions Sales Purchase of inventory Advertising Manufacturing costs Labour costs Purchase of machinery Interest on loan Depreciation Amortization Cost of goods Total of Transactions 375,000 685,000 1,060,000 Chemalite, Inc. Trial Balance For Year Ended December 31, 2003 Cash 113,000 Patents 100,000 Preoperation Costs 7,500 Machinery 212,500 69,500 69,500 Assets Inventory Machinery Accum Depr ### Total Notes Payable 375,000 125,000 62,500 75,000 - - ### ### 75,000 ### 62,500 - - 75,000 62,500 - 125,000 637,500 - - - ### - - ### - ### ### ### ### ### ### 125,000 754,500 175,000 150,000 1,717,000 - 150,000 212,500 - Patent ### 125,000 ### ### ### ### 175,000 ### ### ### ### ### ### ### ### 250,000 - Liabili - Inventory Prototypes Accounts Receivables Advertising Expenses Direct Labour and overhead e Interest expenses Depreciation Expenses Amortization Expenses Supplies Expenses Common Stock Sales Accumulated Depreciation 55,000 23,750 69,500 22,500 430,000 750 10,625 25,000 195,000 1,265,125 500,000 754,500 10,625 1,265,125 Chemalite, Inc. Income Statement For Year Ended December 31, 2003 Revenues Expenses: Legal fees Prototype Advertising Manufacturing and Salaries Interest Cost of Goods Sold Amortization Depreciation Total Expense Net Income 754,500 7,500 23,750 22,500 430,000 750 195,000 25,000 10,625 Chemalite, Inc. (715,125) 39,375 Liabilities + Equity Common Stock Revenues Expenses 500,000 ### 500,000 500,000 Total 500,000 - ### ### ### ### 7,500 23,750 7,500 23,750 - 31,250 31,250 22,500 350,000 80,000 750 10,625 25,000 195,000 715,125 754,500 22,500 350,000 80,000 750 10,625 25,000 195,000 1,469,625 754,500 ### ### ### ### ### ### ### ### ### 754,500 General Journal Date 2003 2-Jan Explanation Debit Patents Common stock 125,000 Credit 125,000 (being exchange of patents for shares.) 31-Dec 31-Dec Depreciation Accumulated depriciation Amortization Accumulated amortization 10,625 10,625 25,000 25,000 CASH PAYMENTS JOURNAL DATE 2003 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Other POST REF Accounts ACCOUNT DEBITED DR. Page 1 Accounts Cash Payable CR. DR. 7500 Preoperation costs 7500 Machinery 62500 Inventory 75000 62500 75000 Prototypes 23,750 23,750.00 Direct costs 430,000 430,000.00 Machinery 150,000 150,000.00 750 750.00 22,500 22,500.00 175,000 175,000.00 947,000 947,000 Interest Advertising Inventory CASH RECEIPTS JOURNAL Account credited 2-Jan Jul - Dec 2003 common stock POST REF Other CR Page 1 Sales Store Sales CR. 375,000 Cash DR 375,000 685,000 Sales 685,000 Sales journal DATE ACCOUNT DEBITED jul-dec 200Auto spares POST REF Accounts sales cr Rec DR 69500.00 69500.00 Patent Date 2003 2-Jan Jul - Dec 2003 Explanation Debit Common stock Amortization 125,000 Common Stock Date Explanation 2003 2-Jan Patents 2-Jan Cash Pre-operation costs Date 2003 15-Jan Machinery Date 2003 15-Jun Jul - Dec 2003 Inventory Date 2003 24-Jun Jul - Dec 2003 Prototypes Date 2003 Debit Credit Balance 25,000 125,000 100,000 Credit Balance 125,000 125,000 375,000 500,000 Explanation Debit Cash 7,500 Explanation Debit Cash Cash 62,500 150,000 Explanation Debit Credit Balance 7,500 Credit Balance 62,500 212,500 Credit Balance Cash 75,000 75,000 Cash 175,000 250,000 Cost of goods (250,000 - 195,000 55,000 55,000) Explanation Debit Credit Balance Jul Cash 23,750 23,750 Accounts receivable Date Jul - Dec 2003 Explanation Sales Debit 69,500 Credit Balance 69,500 Advertising expense Date Jul - Dec 2003 Explanation Cash Debit 22,500 Credit Balance 22,500 Explanation Cash Debit Credit 430,000 Balance 430,000 Explanation Cash Debit 750 Credit Balance 750 Explanation Debit Accumulated depreciation10,625 Machinery Credit Balance Explanation Depreciation expense Credit 10,625 Direct labor, salaries, overheads and other expenses Date Jul - Dec 2003 Interest expense Date Jul - Dec 2003 Depreciation expense Date Jul - Dec 2003 Accumulated depreciation Machinery Date Jul - Dec 2003 10,625 Debit Balance 10,625 Amortization expense Date Jul - Dec 2003 Explanation Patent Debit 25,000 Credit Balance 25,000 Explanation Inventory Debit Credit 195,000 Balance 195,000 Supplies expense Date Jul - Dec 2003 Sales Date Jul - Dec 2003 Date 2003 2-Jan 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Explanation Accounts receivable Cash Cash Explanation Common stock Pre-operation costs Machinery Inventory Prototypes Sales Inventory Advertising expenses Debit Credit Balance 69,500 69,500 685,000 754,500 Debit Credit Balance 375,000 375,000 7,500 367,500 62,500 305,000 75,000 230,000 23,750 206,250 685,000 891,250 175,000 716,250 22,500 693,750 Direct labor, salaries, overheads and other expenses 430,000 263,750 Machinery Interest expense 150,000 113,750 750.00 113,000 Reasons why the company should continue to operate Chemalite Inc. should continue to operate despite the decrease of the cash reserves held by the firm duri year. From the financial statements developed ,the company was able to make Gross profit margin of 74 is a very good sign of the company in regard to its ability to cover its operating expenses such as manuf expenses, salaries and wages and legal fees. This high Gross profit margin also indicates a good sign of company's operating efficiency. After deducting the operating and other expenses, the company reported a Net profit margin of 5%.This that in the first year of its operation the company was able to surpass the break even point and actually m profit.The company can take advantage of the patents and the great innovation in the production of the chemalite to double its Net profit margins before other firms identify other alternative ways of making t product. Therefore the firm should continue operating (Lafrey & Charan, 2008). The shareholder's wealth has also been maximized. The investors of the company are usually contented company management are able to take into consideration the maximization and increasing the value of t shareholder's investment (Wheeler & Sillanpaa, 1997). From the current year, the company reported a 7 return on stockholders equity for the year. This positive return on shareholders equity shows that the fir progressing towards the right direction and should therefore continue to operate. Additionally the company should continue to operate since it has the capability to repay its short term li just in case they arise. The company's current ratio is 237,500:0 meaning that the company has enough resources to repay its short term debts if it were to face cshflow problems in the near future. Further, the company should continue operating since it has a low risk of solvency.The company is not r on borrowings and shareholders capital to fund its assets and activities.From the financial statements pre for the year, the company has a debt to equity ratio of 0% meaning that the shareholders do not owe any creditors any amount of money. Every organization strives to maintain a positive cash balance such that the firm is able to meet its matu short term obligations and expenses and as well as being able to remain solvent such that the firm can h agreements and covenants with lenders, creditors, suppliers. Chemalite has a positive cash flow margin 0f 15% at the end of the year as reported in the financial statements.This means that th company has sufficient cash balance to meet any short term obligations. Therefore, this implies that the liquidity and solvency of the firm is better and should hence continue operating since the company is no any financial difficulties. This can be demonstrated when the company was able to borrow funds from th lender and the company repaid the principal and interest due before the end of the year. Any firm with a financial muscles is likely to succeed in its future operations and thus Chemalite, Inc. should continue b business. Reasons for shutting down the company The company is facing risks of poor management. Benett Alexander - the inventor of the Chemalite pro idea, took over the active management of the Chemalite Inc. Company. Despite Alexander being a chem engineer, he is not an expert in the business world. He lacks the business management expertise and skil manage the business. He doesn't even understand simple book keeping, financial reporting or financial management concepts. This can translate to poor business decision making which may expose the firm t severe losses. As such, the company should be shut down so as to avoid the risk of the firm running into as a result of poor management. The losses may lead to loss of the shareholder's investments and legal s arising from dishonored contracts with lenders of funds and suppliers (Bateman & Snell, 2013). Chemal should therefore be closed down indefinitely till proper management with business expertise is deployed Strengths of the company's financial position. 1.The company has a strong fiancial position in the sense that its able to pay short terms debts as it is ill by the current ratio. 2.The low debt to equity ratio indicates that it has a higher borrowing capacity in case it wanted to expa operations. 3.The company has the financial capability of paying off its operating expenses as its exhibited by the N profit margin. should therefore be closed down indefinitely till proper management with business expertise is deployed Strengths of the company's financial position. 1.The company has a strong fiancial position in the sense that its able to pay short terms debts as it is ill by the current ratio. 2.The low debt to equity ratio indicates that it has a higher borrowing capacity in case it wanted to expa operations. 3.The company has the financial capability of paying off its operating expenses as its exhibited by the N profit margin. Recommendation The company should continue operating. Considering the good financial performance of the company ra from the positive gross profit margins,return on equity and net profit margins for the year 2003 and the p cash flow margin generated by the company for the year, the company can grow and expand significan continues its operations. The issue of management problems can be fixed by recruiting a business knowledgeable personnel to run the company. References Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman s held by the firm during the oss profit margin of 74%. This penses such as manufacturing dicates a good sign of the RATIO ANALYSIS Gross profit margin=((sales-cost of goods)/sales)*100 74% ofit margin of 5%.This shows en point and actually make the production of the tive ways of making the Net profit margin=(Net income/sales)*100 are usually contented if the creasing the value of the company reported a 7% quity shows that the firm is Return on stockholders equity=(Net income available to common stockh repay its short term liabilities company has enough ear future. Cash flow margin Ratio=Cash flows from from operating et sales 15% y.The company is not reliant inancial statements prepared olders do not owe any Current Ratio=Current assets/Current Liabilities. s able to meet its maturing uch that the firm can honor its tive ents.This means that the e, this implies that the nce the company is not facing o borrow funds from the year. Any firm with a strong Inc. should continue being in r of the Chemalite production lexander being a chemical ment expertise and skills to reporting or financial may expose the firm to f the firm running into losses nvestments and legal suits & Snell, 2013). Chemalite Inc. s expertise is deployed. terms debts as it is illustrated case it wanted to expand its s its exhibited by the Net 5% 7% 237500:0 Debt to equity ratio=Total Liabilities /Shareholders equity 0:00 s expertise is deployed. terms debts as it is illustrated case it wanted to expand its s its exhibited by the Net ance of the company ranging he year 2003 and the positive and expand significantly if it uiting a business rwin. ue and profit growth with r maximizing stakeholder able to common stockholders)/stockholders equity. perating et sales Chemalite, Inc. Transaction Analysis Transaction Cash Accts Rec Outstanding shares (start of year) Beginning balance 375,000 Patents(beginning balance) Legal fees Purchase of Machinery Purchase of inventory Prototypes Interim Transactions Sales Purchase of inventory Advertising Manufacturing costs Labour costs Purchase of machinery Interest on loan Depreciation Amortization Cost of goods Total of Transactions 375,000 685,000 1,060,000 Chemalite, Inc. Trial Balance For Year Ended December 31, 2003 Cash 113,000 Patents 100,000 Preoperation Costs 7,500 Machinery 212,500 69,500 69,500 Assets Inventory Machinery Accum Depr ### Total Notes Payable 375,000 125,000 62,500 75,000 - - ### ### 75,000 ### 62,500 - - 75,000 62,500 - 125,000 637,500 - - - ### - - ### - ### ### ### ### ### ### 125,000 754,500 175,000 150,000 1,717,000 - 150,000 212,500 - Patent ### 125,000 ### ### ### ### 175,000 ### ### ### ### ### ### ### ### 250,000 - Liabili - Inventory Prototypes Accounts Receivables Advertising Expenses Direct Labour and overhead e Interest expenses Depreciation Expenses Amortization Expenses Supplies Expenses Common Stock Sales Accumulated Depreciation 55,000 23,750 69,500 22,500 430,000 750 10,625 25,000 195,000 1,265,125 500,000 754,500 10,625 1,265,125 Chemalite, Inc. Income Statement For Year Ended December 31, 2003 Revenues Expenses: Legal fees Prototype Advertising Manufacturing and Salaries Interest Cost of Goods Sold Amortization Depreciation Total Expense Net Income 754,500 7,500 23,750 22,500 430,000 750 195,000 25,000 10,625 Chemalite, Inc. (715,125) 39,375 Liabilities + Equity Common Stock Revenues Expenses 500,000 ### 500,000 500,000 Total 500,000 - ### ### ### ### 7,500 23,750 7,500 23,750 - 31,250 31,250 22,500 350,000 80,000 750 10,625 25,000 195,000 715,125 754,500 22,500 350,000 80,000 750 10,625 25,000 195,000 1,469,625 754,500 ### ### ### ### ### ### ### ### ### 754,500 General Journal Date 2003 2-Jan Explanation Debit Patents Common stock 125,000 Credit 125,000 (being exchange of patents for shares.) 31-Dec 31-Dec Depreciation Accumulated depriciation Amortization Accumulated amortization 10,625 10,625 25,000 25,000 CASH PAYMENTS JOURNAL DATE 2003 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Other POST REF Accounts ACCOUNT DEBITED DR. Page 1 Accounts Cash Payable CR. DR. 7500 Preoperation costs 7500 Machinery 62500 Inventory 75000 62500 75000 Prototypes 23,750 23,750.00 Direct costs 430,000 430,000.00 Machinery 150,000 150,000.00 750 750.00 22,500 22,500.00 175,000 175,000.00 947,000 947,000 Interest Advertising Inventory CASH RECEIPTS JOURNAL Account credited 2-Jan Jul - Dec 2003 common stock POST REF Other CR Page 1 Sales Store Sales CR. 375,000 Cash DR 375,000 685,000 Sales 685,000 Sales journal DATE ACCOUNT DEBITED jul-dec 200Auto spares POST REF Accounts sales cr Rec DR 69500.00 69500.00 Patent Date 2003 2-Jan Jul - Dec 2003 Explanation Debit Common stock Amortization 125,000 Common Stock Date Explanation 2003 2-Jan Patents 2-Jan Cash Pre-operation costs Date 2003 15-Jan Machinery Date 2003 15-Jun Jul - Dec 2003 Inventory Date 2003 24-Jun Jul - Dec 2003 Prototypes Date 2003 Debit Credit Balance 25,000 125,000 100,000 Credit Balance 125,000 125,000 375,000 500,000 Explanation Debit Cash 7,500 Explanation Debit Cash Cash 62,500 150,000 Explanation Debit Credit Balance 7,500 Credit Balance 62,500 212,500 Credit Balance Cash 75,000 75,000 Cash 175,000 250,000 Cost of goods (250,000 - 195,000 55,000 55,000) Explanation Debit Credit Balance Jul Cash 23,750 23,750 Accounts receivable Date Jul - Dec 2003 Explanation Sales Debit 69,500 Credit Balance 69,500 Advertising expense Date Jul - Dec 2003 Explanation Cash Debit 22,500 Credit Balance 22,500 Explanation Cash Debit Credit 430,000 Balance 430,000 Explanation Cash Debit 750 Credit Balance 750 Explanation Debit Accumulated depreciation10,625 Machinery Credit Balance Explanation Depreciation expense Credit 10,625 Direct labor, salaries, overheads and other expenses Date Jul - Dec 2003 Interest expense Date Jul - Dec 2003 Depreciation expense Date Jul - Dec 2003 Accumulated depreciation Machinery Date Jul - Dec 2003 10,625 Debit Balance 10,625 Amortization expense Date Jul - Dec 2003 Explanation Patent Debit 25,000 Credit Balance 25,000 Explanation Inventory Debit Credit 195,000 Balance 195,000 Supplies expense Date Jul - Dec 2003 Sales Date Jul - Dec 2003 Date 2003 2-Jan 15-Jan 15-Jun 24-Jun Jul Jul - Dec 2003 Explanation Accounts receivable Cash Cash Explanation Common stock Pre-operation costs Machinery Inventory Prototypes Sales Inventory Advertising expenses Debit Credit Balance 69,500 69,500 685,000 754,500 Debit Credit Balance 375,000 375,000 7,500 367,500 62,500 305,000 75,000 230,000 23,750 206,250 685,000 891,250 175,000 716,250 22,500 693,750 Direct labor, salaries, overheads and other expenses 430,000 263,750 Machinery Interest expense 150,000 113,750 750.00 113,000 Reasons why the company should continue to operate Chemalite Inc. should continue to operate despite the decrease of the cash reserves held by the firm duri year. From the financial statements developed ,the company was able to make Gross profit margin of 74 is a very good sign of the company in regard to its ability to cover its operating expenses such as manuf expenses, salaries and wages and legal fees. This high Gross profit margin also indicates a good sign of company's operating efficiency. After deducting the operating and other expenses, the company reported a Net profit margin of 5%.This that in the first year of its operation the company was able to surpass the break even point and actually m profit.The company can take advantage of the patents and the great innovation in the production of the chemalite to double its Net profit margins before other firms identify other alternative ways of making t product. Therefore the firm should continue operating (Lafrey & Charan, 2008). The shareholder's wealth has also been maximized. The investors of the company are usually contented company management are able to take into consideration the maximization and increasing the value of t shareholder's investment (Wheeler & Sillanpaa, 1997). From the current year, the company reported a 7 return on stockholders equity for the year. This positive return on shareholders equity shows that the fir progressing towards the right direction and should therefore continue to operate. Additionally the company should continue to operate since it has the capability to repay its short term li just in case they arise. The company's current ratio is 237,500:0 meaning that the company has enough resources to repay its short term debts if it were to face cshflow problems in the near future. Further, the company should continue operating since it has a low risk of solvency.The company is not r on borrowings and shareholders capital to fund its assets and activities.From the financial statements pre for the year, the company has a debt to equity ratio of 0% meaning that the shareholders do not owe any creditors any amount of money. Every organization strives to maintain a positive cash balance such that the firm is able to meet its matu short term obligations and expenses and as well as being able to remain solvent such that the firm can h agreements and covenants with lenders, creditors, suppliers. Chemalite has a positive cash flow margin 0f 15% at the end of the year as reported in the financial statements.This means that th company has sufficient cash balance to meet any short term obligations. Therefore, this implies that the liquidity and solvency of the firm is better and should hence continue operating since the company is no any financial difficulties. This can be demonstrated when the company was able to borrow funds from th lender and the company repaid the principal and interest due before the end of the year. Any firm with a financial muscles is likely to succeed in its future operations and thus Chemalite, Inc. should continue b business. Reasons for shutting down the company The company is facing risks of poor management. Benett Alexander - the inventor of the Chemalite pro idea, took over the active management of the Chemalite Inc. Company. Despite Alexander being a chem engineer, he is not an expert in the business world. He lacks the business management expertise and skil manage the business. He doesn't even understand simple book keeping, financial reporting or financial management concepts. This can translate to poor business decision making which may expose the firm t severe losses. As such, the company should be shut down so as to avoid the risk of the firm running into as a result of poor management. The losses may lead to loss of the shareholder's investments and legal s arising from dishonored contracts with lenders of funds and suppliers (Bateman & Snell, 2013). Chemal should therefore be closed down indefinitely till proper management with business expertise is deployed Strengths of the company's financial position. 1.The company has a strong fiancial position in the sense that its able to pay short terms debts as it is ill by the current ratio. 2.The low debt to equity ratio indicates that it has a higher borrowing capacity in case it wanted to expa operations. 3.The company has the financial capability of paying off its operating expenses as its exhibited by the N profit margin. should therefore be closed down indefinitely till proper management with business expertise is deployed Strengths of the company's financial position. 1.The company has a strong fiancial position in the sense that its able to pay short terms debts as it is ill by the current ratio. 2.The low debt to equity ratio indicates that it has a higher borrowing capacity in case it wanted to expa operations. 3.The company has the financial capability of paying off its operating expenses as its exhibited by the N profit margin. Recommendation The company should continue operating. Considering the good financial performance of the company ra from the positive gross profit margins,return on equity and net profit margins for the year 2003 and the p cash flow margin generated by the company for the year, the company can grow and expand significan continues its operations. The issue of management problems can be fixed by recruiting a business knowledgeable personnel to run the company. References Bateman, T. S., & Snell, S. (2013). Management. New York, NY.: McGraw-Hill/Irwin. Lafley, A. G., & Charan, R. (2008). The game-changer: how you can drive revenue and profit growth w innovation. New York: Crown Business. Wheeler, D., & Sillanpaa, M. (1997). The stakeholder corporation: a blueprint for maximizing stakehol value. London: Pitman s held by the firm during the oss profit margin of 74%. This penses such as manufacturing dicates a good sign of the RATIO ANALYSIS Gross profit margin=((sales-cost of goods)/sales)*100 74% ofit margin of 5%.This shows en point and actually make the production of the tive ways of making the Net profit margin=(Net income/sales)*100 are usually contented if the creasing the value of the company reported a 7% quity shows that the firm is Return on stockholders equity=(Net income available to common stockh repay its short term liabilities company has enough ear future. Cash flow margin Ratio=Cash flows from from operating et sales 15% y.The company is not reliant inancial statements prepared olders do not owe any Current Ratio=Current assets/Current Liabilities. s able to meet its maturing uch that the firm can honor its tive ents.This means that the e, this implies that the nce the company is not facing o borrow funds from the year. Any firm with a strong Inc. should continue being in r of the Chemalite production lexander being a chemical ment expertise and skills to reporting or financial may expose the firm to f the firm running into losses nvestments and legal suits & Snell, 2013). Chemalite Inc. s expertise is deployed. terms debts as it is illustrated case it wanted to expand its s its exhibited by the Net 5% 7% 237500:0 Debt to equity ratio=Total Liabilities /Shareholders equity 0:00 s expertise is deployed. terms debts as it is illustrated case it wanted to expand its s its exhibited by the Net ance of the company ranging he year 2003 and the positive and expand significantly if it uiting a business rwin. ue and profit growth with r maximizing stakeholder able to common stockholders)/stockholders equity. perating et sales