BACKGROUND AND HISTORY Katie Fleming is a local photographer and currently operates her own business, Katies Custom Photography. She specializes in professional photographic services, film developing, camera repair, and sells camera and other photographic equipment. One of her strong market niches has been that she sells very high end cameras and accessories that cater primarily to the professional photographer. She is aware that most of the equipment she sells can be purchased on various web sites and through mail order outlets. The personal service she offers is what has kept her customer base. Her business has always been profitable with an annual sales growth, and as a result she has not spent much time concerned with what she might do to expand or grow her business. She is becoming concerned that her business needs to expand into other areas in case her sales begin to suffer because of the competition from other outlets. Katie has just attended a seminar, and one of the speakers presented an opportunity that interested her. By adding a photo editing program to her computer, purchasing a higher quality printer, and obtaining some additional supplies and materials, she could expand her business to produce photo security identification badges, better known as photo ID badges. She would take the photos and then create the individual security badges. The badges could be just a photo ID, or they could also contain a magnetic strip on the back that could be programmed for various door opening and time keeping functions. This is a growing segment of the larger security services market that has grown exponentially in recent years. Potential markets were discussed at the seminar. It was mentioned that many smaller, local companies would like to increase their levels of security by having photo ID badges for their employees, but the cost to create them internally is prohibitive. She also learned that there are many private security companies that use freelance photographers to take the pictures and create photo ID badges for their clients. This is less expensive for them than buying their own photographic equipment. The more she thought about this opportunity, the more she felt it would be a viable expansion to her current business. The issue is that she has no idea if this decision makes financial sense to her business or if she can afford the start up costs to enter this market. To further complicate the issue, while she was away at the seminar, the accountant that she has used and trusted since she started her business passed away. She knew that she could have conferred with her accountant and received the input she needed to make a financial decision such as this one, but now this help is not available to her. To help her through this crisis, Katie opens the phone book and finds your name under the heading of Business Consulting Services. She calls you and briefly explains her situation, and you agree to meet with her to discuss the possibility of developing a working relationship to meet her accounting needs and provide management consulting services for her business. After meeting with her and gaining a better understanding of the history of her business, you both mutually decide that doing business together seems like a good idea. PART 1 (30 Points) Katies previous accountant, after the end of year financial statements were prepared, always supplied her with several financial ratios. As part of the service, she would receive an explanation of what the various ratios were for the just completed year, if each of the ratios were trending positively or negatively from the previous year, and what she could do to improve them for the upcoming year. One of the documents that Katie left with you was labeled "Financial Ratios." You can find a copy of this document in the Summary Paper Worksheets file with the same name. Using the four financial statements (income statement, retained earnings statement, balance sheet, and cash flows statement) also included in the Summary Paper Worksheets and information in the "EOY Misc. Notes" and the "Financial Ratios" worksheets just mentioned, supply the following information to Katie. Place your answers in the Worksheet labeled Part 1. Step 1 Calculate the following ratios for the year just completed. (1 point each) Current ratio Acid test (Quick) ratio Accounts receivable turnover Days sales in receivables Inventory turnover Average days in inventory Debt to equity ratio Rate of return on assets (ignore interest expense) Rate of return on common stockholders' equity (no preferred dividends) Rate of return on net sales Step 2 Using the information in the Financial Ratios worksheet as your base, identify for Katie if each of the above ratios you calculated indicate an improving or declining trend from the previous year. (1 point each) Current ratio improved or declined? Acid-test (Quick) ratio improved or declined? Accounts Receivable turnover improved or declined? Days sales in receivables improved or declined? Inventory turnover improved or declined? Average days in inventory improved or declined? Debt to equity improved or declined? Rate of return on assets improved or declined? Rate of return on common stockholders' equity improved or declined? Rate of return on net sales improved or declined? Step 3 Whether you have identified an improving or declining trend, tell Katie one thing she could do to improve each of the ratios for the upcoming year. (1 point each) How can the current ratio be improved for the upcoming year? How can the acid-test (quick) ratio be improved for the upcoming year? How can the accounts receivable turnover be improved for the upcoming year? How can the days sales in receivables be improved for the upcoming year? How can the inventory turnover be improved for the upcoming year? How can the average days in inventory be improved for the upcoming year? How can the debt to equity ratio be improved for the upcoming year? How can the rate of return on assets be improved for the upcoming year? How can the rate of return on common stockholders' equity be improved for the upcoming year? How can the rate of return on net sales be improved for the upcoming year? PART 2 (20 Points) As part of the services you will offer Katie, you are going to provide her with an analysis of whether you believe she should or should not invest the necessary money to add the security badge preparation segment to her existing business. The driving force behind your opinion will be based on performing a break even analysis on this additional piece of business. Katie has supplied you with the information from the seminar identifying what the costs to start up and operate this new business would be. She also has determined what the selling price of the badges will be. You will find this information in the worksheet labeled "New Business Information". You have no reason to suspect that the information is incorrect. She also shared with you that if she decides to add this new business, she plans on borrowing the start-up funds. For part 2 of your summary paper, complete the following: Prepare a break even analysis for this additional business and answer the following questions. What will be the break even point in number of ID Badges? (5 points) What will be the break even point in sales dollars? (5 points) In terms of financial leverage: Give Katie two reasons to borrow the money. (5 points) Give Katie two reasons to not borrow the money. (5 points)

Katie's Custom Photography Income Statement Year Ending December 31, 2017 $255.980 66.450 Net Sales Cost of Goods Sold Gross Margin 189.530 Operating Expenses Photographic Services Expense Selling Expense Office Expense Total Operating Expenses ncome From Operations S 56.336 45,075 18,365 119,776 S 69,754 Other Revenues and Expenses Other Revenue 5 6,700 3.300 Interest Income Less Interest Expense Excess of other expenses over other revenues 460 $ 9,540 Net Income $ 79.294 Kate's Custom Photogaphy Statement of Ratained Eamings Year Ending December 31, 2017 Retained eamings, January 1, 2017 584,340 79,294 Net Income theYear Ending December 31, 2017 Divdends Retained eamings, December 31, 2017 5121,834 Kates Custom Adjusted Trial Balance December 31, 2017 Debit Credit Merchandise in enbry Accumulated depreciation Company ehides Accumulated depreciation Offce Equipment Accumulated depreciation- Photo de eloping equipment Photographyservices evenue 0 Business related taveling expense Depreciaton expense Company ehides Depreciaton expense-Ofoe Equipment Depreciaton expense- Photo de eloping equipment 391397 3913S Kate's Custom Statement ofCash Flows Financal Rafos For the Year Ended December 31, 2017 Curent Ratio Acid-test (Quick Rato Cash fows fom operating actvites Net income 79,294 Receivable Turnoer Adjustments to reconcile net income to net Days Sales in Receivables Depeciation expense Changes in current assets and curent liablites 13,180 15,273) 8,120) Inventory Tumover Incease in accounts nceisbe Incease in merchandise in entory 130 days Ag. Days in In entory Incease in prepaid expenses Decease in store supplies Decease in office supplies Decrease in accounts payable Decease in salares payable Total adjustments 1,955 Debt to Equity 18 times 071) Rate of Retum on Assets (13,733 Rate ofRetum on Common Sbckholders Equity Net Cash fom Operating Activty 585,581 Rate of Retum on Net Sales Cash fows fom Inesting Activtyy Sale of long term assets Purchase oflong tem assets Net Cash rom Investing Actiity 1,500 7,370 Cash fows fom Financing Activties S (16.750) 7,358 Additonal long temm debt Additonal common stock Net cash fom Financing Act vty t Increase (Decrease) in Cash $28,799 ofperid42,583 15,764 Cash balance end ofperiod Less cash balance beginning of Net change in Cash account 28799 rfomaton assodatod wth the potontal now busiress ita stat up cost Printer Compuber software supplies 518 625.00 52 700.00 Tanirg 52 (000.00 Cont d bomowing the capital to pay for te stourt up coats Varable coper Badge: Dinect labor c Direct matortal cost $2.67 prbadge 1.08 per bdige Addtion al fixed oot atoolated wm e bedget: 5EDO.CO 5630.00 5120L00 Montly depraciaionabove iden dtatupcts rcnase in annud inaurmnce promium henease ih mortily vertsng Sdiling pice per badge 4.85 Katie's Custom Photography Income Statement Year Ending December 31, 2017 $255.980 66.450 Net Sales Cost of Goods Sold Gross Margin 189.530 Operating Expenses Photographic Services Expense Selling Expense Office Expense Total Operating Expenses ncome From Operations S 56.336 45,075 18,365 119,776 S 69,754 Other Revenues and Expenses Other Revenue 5 6,700 3.300 Interest Income Less Interest Expense Excess of other expenses over other revenues 460 $ 9,540 Net Income $ 79.294 Kate's Custom Photogaphy Statement of Ratained Eamings Year Ending December 31, 2017 Retained eamings, January 1, 2017 584,340 79,294 Net Income theYear Ending December 31, 2017 Divdends Retained eamings, December 31, 2017 5121,834 Kates Custom Adjusted Trial Balance December 31, 2017 Debit Credit Merchandise in enbry Accumulated depreciation Company ehides Accumulated depreciation Offce Equipment Accumulated depreciation- Photo de eloping equipment Photographyservices evenue 0 Business related taveling expense Depreciaton expense Company ehides Depreciaton expense-Ofoe Equipment Depreciaton expense- Photo de eloping equipment 391397 3913S Kate's Custom Statement ofCash Flows Financal Rafos For the Year Ended December 31, 2017 Curent Ratio Acid-test (Quick Rato Cash fows fom operating actvites Net income 79,294 Receivable Turnoer Adjustments to reconcile net income to net Days Sales in Receivables Depeciation expense Changes in current assets and curent liablites 13,180 15,273) 8,120) Inventory Tumover Incease in accounts nceisbe Incease in merchandise in entory 130 days Ag. Days in In entory Incease in prepaid expenses Decease in store supplies Decease in office supplies Decrease in accounts payable Decease in salares payable Total adjustments 1,955 Debt to Equity 18 times 071) Rate of Retum on Assets (13,733 Rate ofRetum on Common Sbckholders Equity Net Cash fom Operating Activty 585,581 Rate of Retum on Net Sales Cash fows fom Inesting Activtyy Sale of long term assets Purchase oflong tem assets Net Cash rom Investing Actiity 1,500 7,370 Cash fows fom Financing Activties S (16.750) 7,358 Additonal long temm debt Additonal common stock Net cash fom Financing Act vty t Increase (Decrease) in Cash $28,799 ofperid42,583 15,764 Cash balance end ofperiod Less cash balance beginning of Net change in Cash account 28799 rfomaton assodatod wth the potontal now busiress ita stat up cost Printer Compuber software supplies 518 625.00 52 700.00 Tanirg 52 (000.00 Cont d bomowing the capital to pay for te stourt up coats Varable coper Badge: Dinect labor c Direct matortal cost $2.67 prbadge 1.08 per bdige Addtion al fixed oot atoolated wm e bedget: 5EDO.CO 5630.00 5120L00 Montly depraciaionabove iden dtatupcts rcnase in annud inaurmnce promium henease ih mortily vertsng Sdiling pice per badge 4.85