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CASE DOUBLE G WESTERN WEAR Gerta Franklin's trip to buy a pair of cowboy boots had been frustrating-the 30-mile drive had yielded no boots. The selection available in her size was sparse, but, more important she had been unable to find her desired red boots. Strange, she thought, how life took a turn that day. On the drive home, she realized that many others living in her hometown had probably had a similar experience. Gerta began to think that she had discovered a fantastic business opportunity. Gerta Franklin and her husband, George, had recently been married and were living in the heart of Central Florida's farm and horse country. George was temporarily between jobs and was currently looking for work on one of the many small farms that dotted the countryside. Gerta worked as a bookkeeper for a successful land developer but had always dreamed of running her own business. The timing was perfect. After three months of careful planning, on November 16, 2016, Gerta and George opened Double G Western Wear for business. Their store specialized in all forms of western equestrian clothing and shoes and was located just off a main business thoroughfare. Although open for only 45 days, the store managed to earn a small profit during 2016. A summary of Double G's 2016 financial information revealed the following: Gerta and George contributed $25,000 and a five-year-old truck valued at $5,000. Both agreed to take an annual salary of $36,000 ($3,000 a month each, starting at opening), reinvesting any annual profits back into the business. Leased space downtown was secured at $5,000 a month. One month's rent plus a $3,000 security deposit was required up front. The lease term began October 1, 2016, and all rent payments were due on the first of each month. Remodeling and improvements were made to the leased space. These included shelving materials ($10,000), four ceiling fans ($800), and contract labor ($3,000). A cash register was purchased for $2,000. Other operating expenses totaled $28,000. Inventory was acquired from two western-wear distributors. It included boots, hats, belts, scarves, vests, and knick- knacks. The total purchase price was $30,000. On November 1, $12,000 was borrowed from a local bank. Terms were 10% per annum required, with interest-only payments due for the first three years. A $15,000 line of credit was also established. Terms allowed for the first $1,000 to be interest-free, with a rate of 2% per annum for any amounts over $1,000. Sales of $82,000 were made through the end of the year. No credit was offered, although 40% of sales were made with credit cards. Credit-card processors charged a 2.5% fee. Inventory was replenished before year-end. During the year, inventory was priced to yield a 70% gross margin. Useful lives for all property and equipment were five years, starting in the month placed in service. Exhibits 1 and 2 present the balance sheet and income statement for Double G Western Wear as of the end of 2016. The Christmas season had helped Double G earn the 2016 profit, but sales returns early in 2017 had dampened the Inaple's enthusiasm. Contrary to the zero returns experienced in December, post-New Year's returns had totaled $5,100. Stamid- January, Gerta realized she needed to plan for the year. She and George projected Double G's 2017 financial theements under what they believed were very conservative assumptions. They assumed that sales would continue at and present rate of approximately $52,000 a month. Sales returns would run at 3%, gross margins would hold at 70%, rent he store would end the year with $35,000 of inventory on hand. Operating expenses-other than owners' salaries. after epreciation, and interest-would be approximately $19,000 a month. Finally, they would need a new truck, which, after trade-in, would cost $20,000.Chapter 3 | Measuring Performance: Cash Flow and Net Income Required 1. Reconstruct the 2016 transactions that led to the balance sheet and income statement presented in Exhibits 1 and 2. 2 . Prepare a forecasted balance sheet as of December 31, 2017 and a forecasted income statement for the year 2017. 13. Using the data provided, prepare a statement of cash flow for the year 2017. Exhibit 1 DOUBLE G WESTERN WEAR Balance Sheet: 12-31-16 Assets Cash . . . .. . $ 6,280 Inventory . .. . 16,400 Prepaid assets . .... 5,000 Deposits . . 3,000 Property and equipment (net) 20,107 Total assets. . . $50,787 Liabilities Interest payable 100 Taxes payable . . 553 Accrued expenses 5,000 Loan . . 12,000 Total liabilities . . . . 17,653 Equity Common stock . . 30,000 Retained earnings. . .. 3, 134 Total equity . . . . $33, 134 Exhibit 2 DOUBLE G WESTERN WEAR Income Statement: 2016 Sales . . . . . . . . . . Cost of goods sold . $82,000 24,600 Gross margin . ... . .. . . . . Owners' salaries . . . .. $57,400 Operating expenses . .. 9,000 Rent . .. . .. 28,000 Depreciation . . . .. 15,000 Interest .. . . . . 693 Credit-card fees . . 200 820 Tax expense 53,713 553 Net income . . . . $ 3,134