Charlie Driver was pleased with the results of 3C Companys operation in year 2005, especially since he only operated on a part-time basis. In fact, he found the catering business to be not only profitable but also an enjoyable challenge. He decided to continue the 3C Company in year 2006, finish his hospitality and marketing education, and search for a suitable restaurant to acquire and operate.

Near the end of year 2006, Charlie found an 84-seat restaurant that had been closed for several months. It was the type of facility he had been looking for. After locating the owner, he reached an agreement to lease the restaurant for five years beginning January 2007. The lease set the first year rental cost at $24,000 and stipulated a 10% yearly rental increase in each of the remaining four years of the five-year lease. In addition, the owner agreed to allow Charlie to trade in the old equipment and furnishings for whatever he can get for them and to purchase new equipment and furnishings. The equipment and furnishings were traded in on new equipment with a net cost of $171,524 and new furnishings with a net cost of $53,596. The new equipment was estimated to have a 12-year life with a residual value of $6,500. The new furnishings had an estimated 8-year life and a residual value of $2,620.

Charlie realized that for tax purposes and other considerations, he should incorporate a new company as Charlies Classic Cuisine Corporation. We will simplify this name to the 4C Company. With the cash he had saved from operating the 3C Company and from the sale of the truck, Charlie purchased $50,000 of 4C Companys $2.00 par value common stock. Charlie used his reputation and good business record over the past two years to obtain a corporate loan from his bank for $200,000. The loan was to be repaid over the next five years in monthly installments of principal and interest.

Although Charlie hired a bookkeeper, he has asked you, a personal friend, to prepare the 4C Companys year-end financial statements and to discuss the results of his first year of operations with him. You agreed to prepare the year-end statements from a year-ending unadjusted trial balance of accounts provided to you.

To make the necessary adjustments, you are given the following information:

• Inventory figures in the unadjusted trial are for the beginning of Year 2007. The December 31, 2007, year-end inventories are $5,915 for food and $2,211 for beverages.
• Accrued payroll of $2,215 must be recognized as of December 31, 2007.
• Depreciation on equipment and furnishings using the straight-line method must be recognized.
• The bank loan principal to be paid in Year 2008 is $38,260.

Using the unadjusted trial and additional information, complete the adjustments and prepare an income statement and balance sheet in the report format for 4C Company for the year ended December 31, 2007. Use an income tax rate of 22% of operating income (income before tax), which will not be paid until the Year 2008.

The unadjusted trial balance is provided on the following page.

4C Company Unadjusted Trial Balance December 31, 2007
Accounts	Debit	Credit
Cash	$ 36,218
Credit card receivables	13,683
Accounts receivable	3,421
Inventories, food	6,128
Inventories, beverages	3,207
Prepaid insurance	2,136
Equipment	171,524
Furnishings	53,596
Accounts payable		$ 8,819
Bank loan payable		163,518
Common stock		50,000
Sales revenue, food operations		458,602
Sales revenue, beverage operations		180,509
Purchases, food (net)	181,110
Purchases, beverages (net)	38,307
Salaries and wages expense	221,328
Laundry expense	16,609
Kitchen fuel expense	7,007
China and tableware expense	12,214
Glassware expense	$1,605
Contract cleaning expense	5,906
Licenses expense	3,205
Misc. operating expenses	4,101
Administrativegeneral expenses	15,432
Marketing expenses	6,917
Utilities expense	7,918
Insurance expense	1,895
Rental expense	24,000
Interest expense	23,981
Unadjusted Trial Balance Totals	$861,448	$861,448

With reference to the 4C Companys unadjusted trial balance, balance sheet, and income statement (Case 2) for the year ending December 31, 0007, calculate each of the following. (This is the first year of 4C Companys operation. When averages are called for but only beginning numbers are available, use the ending numbers shown in Case 2 financial statements.)

• a. Working capital
• b. Current ratio
• c. Quick ratio
• d. Credit card receivables average collection period (Credit card sales revenue is 60% of total sales revenue.)
• e. Accounts receivable average collection period (Accounts receivable is 10% of total sales revenue.)
• f. Net return on assets
• g. Net income to total sales revenue ratio
• h. Return on stockholders equity
• i. Food inventory turnover ratio
• j. Beverage inventory turnover ratio
• k. Cost of sales, food percentage
• l. Cost of sales, beverage percentage
  • 1. To conserve cash during the first year of operation, Mr. Driver limited his salary to $1,500 per month. Explain whether the funds being withdrawn as a salary are considered as a deductible operating expense to the 4C Company.
  • 2. Prepare a short discussion of each calculated ratio, which you believe may be unsatisfactory, and explain why.
  • 3. It appears that 4C has a good liquid cash position, and Mr. Driver is considering using $20,000 of 4C cash to redeem some of his shares of common stock before the final financial statements of the current year are prepared. He asks for your opinion. Recalculate any of the preceding ratios that will be affected by the repurchase of the stock and discuss the effects if the stock repurchase is made.