Sarahhas taken over asthenew Controller ofSmartMInc.Inc, a revolutionary manufacturingbusiness in BC. Despite not having a solidaccounting background,Sarahis looking to lead the way in making some long-overdueorganizational changes.She has been withSmartMInc.for almost three years, soshe has some ideasfor improvingprocesses.

Sarah's direct supervisor,Amy, also doesn't have an accounting background. When the previous CFO retired suddenly last month,Amywas immediately promoted to the Chief Financial Officer role. She, in turn, promotedSarah, who had been in the finance department and had helped her with a few projects, to Controller. The Controller role was a new one created byAmytohelpdeal with the company's growing accounting demands.

SinceAmyhad worked as an administrative assistant to the previous CFO for five years,Sarahhad assumed she was fit to take over. Still,shewonderedif perhaps the companylacksaccounting expertise/leadership. Seeing how the only other accounting employee inSmartMInc.isSusan, an Accounting Assistant working under her,Sarahwonders if an external candidate would be better suited for herController role.

The first thing forSarahis to complete the budget for the year 2022. Because of the sudden leave of the CFO, the budget for 2022 is not finished.

SmartMInc.Inc.has completed all operating budgetsexceptthe income statement for 2022. Selected data from these budgets follow.

Sales: $280,000

Purchases of raw materials: $80,000

Ending inventory of raw materials: $15,000

Direct labor: $40,000

Manufacturing overhead: $73,000, including $3,000 of depreciation expense

Selling and administrative expenses: $36,000,including depreciation expense of $1,000

Interest expense: $5,000

Principal payment onlong termnote: $20,000each year

Dividends declared: $18,000

Income tax rate: 30%

Other information:

Assume that there are no work-in-process or finished goods inventories.

Year-end accounts receivable: 4% of 2022 sales.

Year-end accounts payable: 50% of ending inventory of raw materials.

Interest, direct labor, manufacturing overhead, and selling and administrative expenses other than depreciation are paid as incurred.

Dividends declared and income taxes for 2022 will not be paid until 2023.

SmartMInc.

Balance Sheet

31-Dec-21

Assets

Current assets

Cash

$20,000

Raw materials inventory

10,000

Total current assets

30,000

Long term investment

88,000

Property, plant, and equipment

Equipment

$40,000

Less: Accumulated depreciation

4,000

36,000

Total assets

$154,000

Liabilities and Stockholders Equity

Liabilities

Accounts payable

$5,000

Long-termnotes payable

110,000

Total liabilities

$115,000

Stockholders' equity

Common stock

25,000

Retained earnings

14,000

Total stockholders' equity

39,000

Total liabilities and stockholders' equity

$154,000

Sarahwants topreparebudgetedfinancial statements, butshe needs some help.

SmartMInc.is considering an investment of $180,000 in new equipment. The new equipment is expected to last ten years. It is estimated to have azero salvagevalue at the end of its useful life.SmartMInc.expects the same total net cash flows of $270,000 over the life of the investment. But, because of declining market demand for the product over the life of the equipment, the net annual cash flows are higher in the early years and lower in the later years,as below illustration:

Year

Assumed Net Annual Cash Flows

1

40000

2

38000

3

35000

4

32000

5

28000

6

22000

7

21000

8

20000

9

19000

10

15000

270000

Sarahhas todetermine whether to add new equipment or not.The required return is 10% forSmartMInc.Amymentioned the critical of the loan from the Bank. Accepting the opportunity would mean an immediate investment of $180,000 bySmartMInc.Those funds can be borrowed from theBank at 5% per annum.Sarahrecalled the email from the bank manager as follows:

COVENANT COMPLIANCE

The undersigned certifies that they have not contravened any of the terms and conditions of the Bank's credit facility pursuant to the Facility Letter and that theyare in compliance withthe following financial covenants and the other conditions stipulated therein.

1.Total debt to tangible net worth ratio not to exceed2.00 to 1.00.Actual ___________

2.Current ratio to be maintained at a minimum of1.25.Actual ___________

The bank manager said the ratios could be based on the budgeted financial statement for 2022 without the new equipment.

Sarah's new contract promises thatshe will receive, as a year-end bonus, 1% of all growth inSmartMInc.'s pre-tax net income over the prior year. Hence,she is excited about expanding operations and taking on theequipment.She is also wondering ifspecific accounting policies canbe implemented to increase income on paper, even if nosignificantchanges are made in the business.

HelpSarahpreparea budgeted multiple-step income statement for the year ending December 31, 2022, anda budgeted classified balance sheet as of December 31, 2022.

AdviseSarahon hercareer path and the current outlook onSmartMInc.Produce a business report, including comprehensive analysis, recommendations, and any questions you may need to ask your client.