The local farming association and nearby First Nations community have joined forces to open up a greenhouse. The business name for this greenhouse venture is “Good Food”. There will be strong demand for the company’s products as the local Farmer’s Market is very busy with customers seeking fresh produce. The greenhouse will aim to provide employment opportunities to the unemployed looking for job experience. You have been hired as the “Office Coordinator” and you are responsible for preparing the financial information for the upcoming board of directors meeting.

The opening balance sheet for this greenhouse on January 1, 2022, included the following: Cash $100,000, Inventory $150,000, Equipment $600,000 cost, Accounts Payable $50,000, Long Term Bank Loan $400,000 and Equity. You are responsible for determining the Equity value.

For the 2022 year, the following income and expenses are projected: sales revenue of $1 Million, cost of goods sold of $400,000, depreciation of $60,000, wages of $280,000, utilities of $110,000, rent of $50,000, the interest of $20,000 and advertising expenses of $40,000. The Income Statement period is from January 1^st to December 31^st. The debt repayment for the long-term loan of $400,000 will be $50,000 in principal plus $20,000 in interest (5% per year) for the first year.

As the Office Coordinator, you need to prepare the answers or information to the following “Information Required” for the upcoming Board of Directors meeting.

Information Required

1) Prepare the opening balance sheet and projected Income Statement from the information provided for the 2022 year.

2) From the Balance Sheet, calculate the debt to equity ratio, the debt to assets ratio, and the current ratio. Explain why it is important to have equity.

3) For the projected December 31, 2022, income statement, calculate the following: Gross profit to sales ratio and net income to sales ratio. Explain how much net income is required from this business venture and why.

4) The equipment as of opening day is depreciated using the straight-line method having an expected life of 10 years and a terminal (salvage) value of $40,000. Calculate the depreciation expense assuming no further assets were purchased for years 1 and 2 along with the accumulated depreciation and net book value at the end of 2 years. Explain why depreciation is referred to as a non-cash expense.

5) At the end of the first year, there is the possibility of expanding the Greenhouse that would require an additional bank term loan of $500,000 that would have to be repaid back evenly over 5 years at a 5% interest rate. Provide your explanation if the greenhouse has the financial ability to take on this possible expansion at the end of one year.