Serial Problem Kate's Cards

Kate is very pleased with the results of the first year of operation for Katie's cards. She ended the year on a high note, with the company's reputation for producing quality cards leading to more business than she can currently manage. Kate is considering expanding and bringing in several employees. In order to do this, she will need to find a larger location and also purchase equipment. All this means additional financing. Kate has asked you to look at her year-end financial statements as if you were a banker considering giving Kate a loan. Comment on your findings and provide calculations to support your comments.

KATE'S CARDS

Income Statement

Year Ended August 31, 2019

Sales revenue.........................................................................................................................................$185,000

Costs of goods sold...............................................................................................................................106,000

Gross profit...........................................................................................................................................79,000

Operating expenses wages..................................................................................................................18,000

Consulting............................................................................................................................................11,850

Insurance.............................................................................................................................................1,200

Utilities..................................................................................................................................................2,400

Rent........................................................................................................................................................14,400

Depreciation...........................................................................................................................................3,250

Total operating expenses........................................................................................................................51,100

Income from operations............................................................................................................................27,900

Interest expense............................................................................................................................................900

Income before income tax.............................................................................................................................27,000

Income tax expense...................................................................................................................................5,400

Net income................................................................................................................................................$21,600

KATE CARD'S

Balance Sheet

August 31, 2019

Asset

Current asset

Cash............................................................................................................................................................$17,400

Account Receivable...................................................................................................................................11,000

Inventory...................................................................................................................................................16,000

Prepaid insurance.......................................................................................................................................1,000

Total current assets......................................................................................................................................45,400

Equipment......................................................................................................................................................17,500

Accumulated Depreciation............................................................................................................................3,250

Total Assets....................................................................................................................................................$59,650

Liabilities

Current liabilities

Accounts payable...........................................................................................................................................$6,200

Unearned revenue...........................................................................................................................................1,250

Other current liabilities...................................................................................................................................1,900

Total current liabilities....................................................................................................................................9,350

Note payable................................................................................................................................................15,000

Total liabilities..............................................................................................................................................24,350

Stockholders' equity

Common stock..................................................................................................................................................500

Additional paid-in-capital................................................................................................................................9,500

Preferred Stock...............................................................................................................................................5,000

Retained earnings..........................................................................................................................................20,300

Total Stockholders' equity...............................................................................................................................35,300

Total liabilities and stockholders' equity..........................................................................................................$59,650

KATE'S CARDS

Statement of Cash Flows

Year Ended August 31, 2019

Cash flow from operating activities

Net income....................................................................................................................................................$21,600

Add depreciation..........................................................................................................................................3,250

Increase in accounts receivable.................................................................................................................(11,000)

Increase in Inventory.................................................................................................................................(16,000)

Increase in prepaid expense.......................................................................................................................(1,000)

Increase in accounts payable......................................................................................................................6,200

Increase in unearned revenue.....................................................................................................................1,250

Increase in other current liabilities...............................................................................................................1,900

Cash provided by operating activities..........................................................................................................6,200

Cash flow from investigating activities

Purchase of equipment..............................................................................................................................(17,500)

Cash used by investigating activities.............................................................................................................(17,500)

Cash flow from financing activities

Proceeds from bank note............................................................................................................................15,000

Issuance of common stock.........................................................................................................................10,000

Issuance of preferred stock.........................................................................................................................5,000

Cash dividends.........................................................................................................................................(1,300)*

Cash provided by financing activities.........................................................................................................28,700

Net increase in cash..................................................................................................................................17,400

Cash at beginning of year..................................................................................................................................0

Cash at end of year.....................................................................................................................................17,400