Part 1 Statement of Cash Flows

Guy and Susan Johnson owns Johnsons Jewelry Products (JJP) stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30 miles west of Florence. Guy has been in the retail line for over 30 years, and he worked at his uncles hobby shop while in high school and college before starting his own store at the age of 25. Susan used to be a legal assistant at a local law office before quitting to help her husband run the jewelry store.

Two big secrets to a successful jewelry store operation are good location and product selection. Guys first store is located in downtown Florence. Since he had been born and raised in Florence, he attracted a good customer base that remained loyal to his store after some of the giant chain related jewelry stores began to move into the area. About 10 years ago, Guy saw the change in customer shopping habits and purchased a second store near an interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and Guy could not totally rely on the good old boy market alone to sustain his market share. This second store catered to the younger more mobile generation that shopped at or near malls.

Guy now was looking into other markets. Sumter was not located on the interstate, but the area was growing because of its proximity to the state capital of Columbia, which was just 30 miles to its west. Guy believed that the people of Sumter who commuted to work in Columbia would prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since Guy was a respected citizen of Florence, his reputation as an honest businessman had spread to Sumter. He believed he could quickly build up a new customer base in that location. The big chain type stores also did not seem as interested in the Sumter area, preferring instead to locate in the larger metropolitan areas of Columbia and Florence. The appropriate jewelry items to feature in his stores were very important. Guy felt that his area of influence was strictly regional, and he did not have to carry much of the standard inventory of the national chain type of jewelry stores. His jewelry was more a reflection of local interest; thus a lot of his wedding ring sets and related items were hot sellers.

Guy went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $350,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking. He brought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $350,000. (Copies of the financial statements are listed at the end of the quiz).

Michael Miser, the local bank loan vice president had been a friend of Guys for many years. He was a customer at Guys jewelry store and purchased his wedding ring set from Guys store, and his bank had underwritten the funding for the second store. Michael was excited about Guys expansion goals and the prospect of another business loan with his friend. At the same time, Michael had to live up to his reputation and because of interest rates being what they are, he had to be very critical of any loan coming across his desk. He was not about to approve a loan unless he was almost 100 percent sure that the borrower would not default. Guys past success had alleviated much of Michaels concern, but he still wanted to complete a detailed analysis of the financial performance of JJP during the last calendar year. Upon reviewing the balance sheet, Michael knew with the covid pandemic recently, foot traffic was reduced at many retail stores, but JJP showed a strong profitable performance. The current financial statements did not seem to give enough information to answer Michaels questions and he asked Guy to prepare a statement of cash flows for the year ending December 31, 20xx. Guy has come to you for some help with this loan.

Additional transaction data

A. The accounts payable balances result from inventory purchases.

B. Purchased $60,000 in plant assets by issuing $60,000 of notes payable.

C. Sold plant assets with a book value of $8,000 (original costs of $20,000 and accumulated depreciation of $12,000) for $2,000 cash, yielding a $6,000 loss.

D. Received $15,000 cash from issuing 3,000 shares of common stock.

E. Paid $18,000 cash to retire notes with a $34,000 book value, yielding a $16,000 gain.

F. Declared and paid cash dividends of $14,000

Required:

1. Develop a Statement of Cash Flows for JJP for the 2^nd year ending December 31, 20xx.

2. Analyze the financial performance of JJP based on ALL the financial statements (using ratios and cash flows.)

3. If you were Guy how would you explain to Michael Miser the financial situation to help justify the loan request? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

4. If you were Michael Miser, would you approve the loan for JJP? Why or why not? (Not just yes or no question, please ratios and cash flows to support your analysis in your answer!)

JJP info for the last two years Balance sheets

Balance Sheet	Year 2	Year 1
Assets
Current Assets
Cash	$17,000 22k	$12,000 3k
Accounts receivable	60,000 22k	40,000 23k
Inventory	84,000	70,000
Prepaid Expenses	6,000	4,000
Long term assets
Equipment	250,000	210,000
Accumulated Dep. Plant assets	(60,000)	(48,000)
Total Assets	$357,000	$288,000
Liabilities
Current Liabilities
Accounts Payable	35,000	40,000
Income Tax Payable	3,000	4,000
Income taxes payable	22,000	12,000
Dividends Payable	0	0
Long-term liabilities
Long term notes payable	90,000	64,000
Total Liabilities	$150,000	$120,000
Stockholders Equity
Common Stock $5 par	95,000	80,000
Retained Earnings	112,000	88,000
Total Stockholders Equity	207,000	168,000
Total Liab. And Stockholders Equity	$ 357,000	$288,000

JJP Income Statement last year

Income Statement Year 2
Sales Revenue		$ 590,000
Costs of Goods Sold		300,000
Gross Profit		290,000
Operating Expenses
Other Operating Expense	$216,000
Depreciation Expense-Plant Assets	24,000
Interest Expense	7,000
Total Operating Expenses		247,000
Operating Income		43,000
Other Revenue and Expenses
Loss on Sale of Plant Assets	(6,000)
Loss on retirement of bonds	16,000
Total other Rev and Exp.		10,000
Net Income Before Taxes		53,000
Income Tax Expense		(15,000)
Net Income		$38,000