Case Assignment (Community Farmers Market)

(Situation)

The Community Farmers Market is an idea developed by the local farming association and nearby First Nations community. They have joined forces to open up a Farmers Market that would be located in a retail location on the First Nation community. The business is planning to sell locally produced food items and hand made clothing and jewellery. The Community Farmers Market would operate on the Saturday and Sunday of every weekend except on holidays. The business will aim to provide employment opportunities to the unemployed looking for job experience and a source of revenue for the various vendors that will stock the booths at the market. You have been hired as the Administration Officer and you are responsible in preparing the financial information for the upcoming board of directors meeting. The board of directors meet monthly and review the financial results to help set the operating framework for this Farmers Market.

The opening balance sheet for this greenhouse on January 1, 2022, included the following: Cash $40,000, Inventory $20,000, Equipment $50,000 cost, Accounts Payable $10,000, Long Term Bank Loan $40,000 and Equity of $60,000.

For the 2022 year, the following income and expenses are projected: sales revenue of $500,000, cost of goods sold of $250,000, depreciation of $12,500, wages of $140,000, utilities of $10,000, rent of $15,000, interest of $5,000 and advertising expenses of $20,000. The Income Statement period is from January 1^st to December 31^st. The debt repayment for the long term loan of $50,000 will be $1,000 monthly principal plus 10% yearly interest.

As the Administration Officer, you need to prepare the answers or information to the following Information Required for the upcoming Board of Directors meeting.

Information Required

1) Prepare the opening balance sheet and projected Income Statement from the information provided for the 2022 year. Provide your opinion on the financial statement by indicating any financial strengths or weaknesses, and advise if the business is projected to be profitable.

2) From the Balance Sheet, calculate the debt to equity ratio, the debt to assets ratio, and the current ratio. The industry average for the debt to equity and current ratio is 1 to 1 and 4 to 1 respectively, explain how the Community Farmers Market compares to the industry average.

3) For the projected December 31, 2022, income statement, calculate the following: Gross profit to sales ratio and net income to sales ratio. Explain how much net income is required from this business venture to pay for all their business needs.

4) The equipment as of opening day is depreciated using the straight-line method having an expected life of 4 years and a terminal (salvage) value of $Nil. Calculate the depreciation expense assuming no further assets were purchased for all 4 years along with the accumulated depreciation and net book value at the end of each year for all 4 years. Explain why it is necessary to claim depreciation expense.

5) At the end of the first year, the local farming association wants to expand the Farmers Market by purchasing a $500,000 building that would require $200,000 in equipment and furnishings and would have to be repaid back evenly over 5 years at a 10% interest rate. There would be an increase to all other expenses in the amount of $40,000. Sales are expected to double in the new premises. Provide your explanation if the Community Farmers Market would have the financial ability to take on this possible expansion at the end of one year. Would you recommend this expansion.