Solve foGroup Case: SmartM Inc.

Sarah has taken over as the new Controller of SmartM Inc. Inc, a revolutionary manufacturing business

in $BC.$ Despite not having a solid accounting background, Sarah is looking to lead the way in making

some long$-$overdue organizational changes. She has been with SmartM Inc. for almost three years, so

she has some ideas for improving processes.

Sarah's direct supervisor, Amy, also doesn't have an accounting background. When the previous CFO

retired suddenly last month, Amy was immediately promoted to the Chief Financial Officer role. She, in

turn, promoted Sarah, 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 by Amy to help deal with the company's

growing accounting demands.

Since Amy had worked as an administrative assistant to the previous CFO for five years, Sarah had

assumed she was fit to take over. Still, she wondered if perhaps the company lacks accounting

expertise$/$leadership$.$ Seeing how the only other accounting employee in SmartM Inc. is Susan, an

Accounting Assistant working under her, Sarah wonders if an external candidate would be better suited

for her Controller role.

The first thing for Sarah is to complete the budget for the year $2022.$ Because of the sudden leave of the

CFO, the budget for $2022$ is not finished.

SmartM Inc. Inc. has completed all operating budgets except the 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 on long term note: $$20,000$ each 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 $2023.$

SmartM Inc.

Balance Shee

Assets

$31-$Dec$-21$

Curr

Cash

Total current asentory

Long term investment

Property, plant, and equipment

Equipment

Less: Accum

Total assets

Liabilities

Accounts payable

Long$-$term notes

Total liabilities

Stockholders' equity

Retained earning

Total stockholders' equity

Total liabilities and stockholders'

equity

Sarah wants to prepare budgeted financial statements, but she needs some help.

SmartM Inc. is considering an investment of $$180,000$ in new equipment. The new equipment is

expected to last ten years. It is estimated to have a zero salvage value at the end of its useful life.

SmartM Inc. 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:

Sarah has to determine whether to add new equipment or not. The required return is $10\%$ for SmartM

Inc. Amy mentioned the critical of the loan from the Bank. Accepting the opportunity would mean an

immediate investment of $$180,000$ by SmartM Inc. Those funds can be borrowed from the Bank at $5\%$

per annum. Sarah recalled 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 they are in compliance with the following financial

covenants and the other conditions stipulated therein.

Total debt to tangible net worth ratio not to exceed $2\mathrm{.}00$ to $1\mathrm{.}00$

Actual

Current ratio to be maintained at a minimum of $1\mathrm{.}25.$

Actual

The bank m

Sarah's new contract promises that she will receive, as a year$-$end bonus, $1\%$ of all growth in SmartM

Inc.$\text{'}$s pre$-$tax net income over the prior year. Hence, she is excited about expanding operations and taking on the

Budgeted Income Statement, Balance Sheet and Ratio Analysis and interpret