CAC 510 FINANCIAL ACCOUNTING

Assignment 7 Questions

Case: The 10 Beach Hut by Dana Gillett and Julie Harvey, Richard Ivey School of Business

1. What was Mandy Arlington's business?

2. What was Mandy Arlington's brand name?

3. Explain what "sole proprietorship" is.

4. Would you say the idea of sole proprietorship was in line with the vision of the protagonist? Advise Mandy on this issue.

5. Losses were incurred in the first few years. a. Comment about this.

b. After how many years was a profit made?

c. How do you explain the fact that the business made losses for all the years you have indicated and yet was able to survive?

6. In exhibit 2, there is an item "drawings". Explain its meaning in regard to (1) sole proprietorship and (2) Company

7. Using Exhibit 3;

(a) Explain what is meant by "prepaids."

(b) Compute the working capital of the business for 2003 and 2004. Explain what your figures mean.

THE 10 BEACH HUT

Upon graduation, a young business school student, Mandy Arlington, decided to follow her dream of becoming a clothing designer. After much thought, she decided to design her own line of beachwear to be sold in beach towns across the province of Ontario in Canada. Arlington would design the clothing and have it produced by a local manufacturer. After researching suppliers, manufacturers, vendors and office locations, Arlington's clothing line, The 10 Beach Hut, was launched as a sole proprietorship in January of 2001, in time for the upcoming spring season. Operations started slowly and losses were incurred in the first few years; however, by 2004, sales resulted in a profit as demand grew for the 10 beach Hut wear. Selected financial statements for 2003 and 2004 are shown in Exhibits 1, 2 and 3.

Exhibit 1

STATEMENT OF EARNINGS

For the year ending December 31, 2004

Net Sales$296,475

Cost of goods sold221,109

Gross profit75,366

Operating expenses

Selling and administration$48,384

Amortization6,106

Interest14,115

68,605

Net income$6,761

Additional note regarding 2004 operations:

1.The owner made an additional $5,580 capital in October 2004 (see Exhibit 2).

Exhibit 2

STATEMENT OF CAPITAL

For the year ending December 31, 2004

Beginning Capital (2003)$ 45,627

Net income6,761

Capital investment5,580

57,968

Less: drawings3,283

Ending capital (2004)$ 54,685

Exhibit 3

BALANCE SHEETS

For the years ending December 31, 2003 and 2004

ASSETS20042003

Current assets:

Cash$ 3,939$ 1,970

Accounts receivable73,85660,726

Inventory65,32258,100

Prepaids1,3131,641

Total current assets$144,430$122,437

Fixed assets:

Land16,08416,084

Building & fixtures$ 79,764$ 72,543

Less: accum.amortization20,548 59,216 14,442 58,101

Total net fixed assets75,300 74,185

Total assets$219,730 $ 196,622

LIABILITIES & OWNER'S EQUITY

Current liabilities:

Bank indebtedness$32,760$23,962

Accounts payable40,375 31,840

Total current liabilities73,13555,802

Long-term debt91,91095,193

Total Liabilities91,91095,193

Owner's equity:

Owner, capital54,68545,627

Total liabilities and owner's equity$219,730$196,622

Several fixed assets worth $7,221 were purchased throughout the year, however, no fixed assets were sold during the year.