The spreadsheet includes 2019 and 2020 actual results (Chips was purchased effective January 1, 2020, so the 2019 results are just for comparison). Note that Retained Earnings started 2020 at $0 to reflect the new ownership. The company needed $100,000 of capital from owners (equity) so it issued 100,000 shares of stock at $1 per share. 2020 results include the new method for accounting for direct labor costs (labor costs associated with making the cookies are recorded as Cost of Goods Sold). Note that Accounts Payable is only for the direct materials used in making the cookie. Chips also reduced its managers by 1, using 2 managers to manage the 3 stores. In addition, it was able to reduce its lease costs as hoped.

Chips has now completed its first year of operations. Unfortunately, the results were not as good as forecast, resulting in a loss. The CFO needs to report to the Board of Directors and has requested some analysis to understand what happened to cause the loss and also to understand the company's cash flow and working capital. He has one additional significant concern - we have come close to maxing out our Line of Credit, which is limited to $150,000. He does not want to increase the loan - in fact he would like to reduce it significantly. He also does not want to receive more equity money (investors).

1. Based on the Financial Statements, what were three things that caused the poor performance? Focus on both the Income Statement and Balance Sheet. Make sure you give details - for example, if revenue was low, did it go down because we had a lower average price or because we sold fewer cookies?

2. Were there any mitigating factors that helped reduce the size of the loss (do you notice anything on the income statement and balance sheet that would indicate some positive items of note)? If so, what were those?

3. Currently, we do not track Accounts Receivable, even though we actually do have accounts receivable due to the lag between the time we receive credit card payments from our customers and when we actually receive the cash. Please estimate what our accounts receivable balance should be at the end of 2020 by estimating 3 days of sales as an Accounts Receivable, and reduce the cash balance by the same amount. In Proforma 1, re-state the Balance Sheet to reflect the change.

4. Using the 2020 Proforma 1, calculate the number of days of Cash for expenses that Chips had on hand at the end of 2020. To do this, use the total of the operating expenses (Fixed Costs) (adjust for depreciation) and the Cost of Goods Sold (Variable Costs) for the year (2020) and calculate the average daily need for cash. Then calculate the number of days of cash on the Balance Sheet at the end of the year. Do you think this is too much, just right, or not enough?

Chips Income Statement 2020 (Year 1) 2019 Actual 1,182,139 $ 1,101,368 2020 (Year 1) Pro- Forma 1 2020 (Year 1) Pro- Forma 2 Revenue $ $ Material Cost of Goods Sold Labor Cost of Goods Sold Total Cost of Goods Sold Gross Margin Gross Margin % $ $ $ $ 474,036 $ 173,828 $ 647,864 $ 534,275 $ 45.2% 444,094 182,624 626,718 474,650 43.1% Operating Expenses Lease Expense $ Utilities Expense $ Manager Salary Expense $ Manager Salary PT&B Expense $ Hourly Wage Expense $ Hourly Wage PT&B Expense $ Marketing Expense $ Professional Services Expense $ Office Supplies and Misc Supplies Expense $ Repairs and Maintenance Expense $ Insurance Expense $ Depreciation Expense $ Total Operating Expenses $ 114,480 $ 39,222 $ 156,060 $ 48,376 $ 81,840 $ 5,074 $ 15,566 $ 29,633 $ 2,444 $ 8,497 $ 7,161 $ 13,390 $ 521,743 $ 108,756 40,399 120,000 37,198 83,477 5,176 18,497 36,478 2,983 12,479 7,598 13,390 486,430 Earnings Before Interest and Taxes $ 12,532 $ (11,780) $ 11,254 $ 11,631 Interest Expense Year 1 Results Revenue + Tax Expense Net Income Net Income % $ $ 320 $ 958 $ 0.1% (5,853) (17,558) -1.6% Chips Balance Sheet 136,497 Current Assets Cash Accounts Receivable Inventory Total Current Assets $ $ $ $ 158,875 $ $ 17,055 $ 175,930 $ 14,897 151,394 Equipment and Leasehold Improvements $ Accumulated Depreciation $ Tota Fixed Assets $ 133,896 $ (37,762) $ 96,134 $ 133,896 (51,152) 82,744 Total Assets $ 272,064 $ 234,138 Current Liabilities Accounts Payable Taxes Payable Total Current Liabilities $ $ $ 62,130 $ 320 $ 62,450 $ 12,167 (5,853) 6,314 Long-term Debt Total Liabilities $ $ 101,686 $ 164,136 $ 145,382 151,696 Stock Retained Earnings Total Equity $ $ $ 100,000 $ 7,928 $ 107,928 $ 100,000 (17,558) 82,442 Year 1 Results Revenue Chips Cookie Revenue 2019 2020 Boise Town Square Indvidual Units Box Units Total Cookies Cookie Prices Total Per Cookie $ 3.00 $ 3.00 $ 10.00 $ 2.50 43,543 23,074 135,839 40,497 21,983 128,429 Individual Box of 4 Individual Revenue Box Revenue Total Revenue $ 130,629 $ 121,491 $ 230,740 $ 219,830 $361,369 $ 341,321 Boise Spectrum Center Indvidual Units Box Units Total Cookies 47,437 26,908 155,069 43,483 24,974 143,379 Individual Revenue Box Revenue Total Revenue $ 142,311 $ 130,449 $ 269,080 $ 249,740 $ 411,391 $ 380,189 Vista Village Indvidual Units Box Units Total Cookies 45,983 27,143 154,555 42,446 25,252 143,454 Individual Revenue Box Revenue Total Revenue $ 137,949 $ 127,338 $ 271,430 $ 252,520 $ 409,379 $ 379,858 Total I 12 orn 12 A Total Indvidual Units Box Units Total Cookies 136,963 77,125 445,463 126,426 72,209 415,262 Individual Revenue Box Revenue Total Revenue $ 410,889 $ 379,278 $ 771,250 $ 722,090 $1,182,139 $ 1,101,368 Chips Income Statement 2020 (Year 1) 2019 Actual 1,182,139 $ 1,101,368 2020 (Year 1) Pro- Forma 1 2020 (Year 1) Pro- Forma 2 Revenue $ $ Material Cost of Goods Sold Labor Cost of Goods Sold Total Cost of Goods Sold Gross Margin Gross Margin % $ $ $ $ 474,036 $ 173,828 $ 647,864 $ 534,275 $ 45.2% 444,094 182,624 626,718 474,650 43.1% Operating Expenses Lease Expense $ Utilities Expense $ Manager Salary Expense $ Manager Salary PT&B Expense $ Hourly Wage Expense $ Hourly Wage PT&B Expense $ Marketing Expense $ Professional Services Expense $ Office Supplies and Misc Supplies Expense $ Repairs and Maintenance Expense $ Insurance Expense $ Depreciation Expense $ Total Operating Expenses $ 114,480 $ 39,222 $ 156,060 $ 48,376 $ 81,840 $ 5,074 $ 15,566 $ 29,633 $ 2,444 $ 8,497 $ 7,161 $ 13,390 $ 521,743 $ 108,756 40,399 120,000 37,198 83,477 5,176 18,497 36,478 2,983 12,479 7,598 13,390 486,430 Earnings Before Interest and Taxes $ 12,532 $ (11,780) $ 11,254 $ 11,631 Interest Expense Year 1 Results Revenue + Tax Expense Net Income Net Income % $ $ 320 $ 958 $ 0.1% (5,853) (17,558) -1.6% Chips Balance Sheet 136,497 Current Assets Cash Accounts Receivable Inventory Total Current Assets $ $ $ $ 158,875 $ $ 17,055 $ 175,930 $ 14,897 151,394 Equipment and Leasehold Improvements $ Accumulated Depreciation $ Tota Fixed Assets $ 133,896 $ (37,762) $ 96,134 $ 133,896 (51,152) 82,744 Total Assets $ 272,064 $ 234,138 Current Liabilities Accounts Payable Taxes Payable Total Current Liabilities $ $ $ 62,130 $ 320 $ 62,450 $ 12,167 (5,853) 6,314 Long-term Debt Total Liabilities $ $ 101,686 $ 164,136 $ 145,382 151,696 Stock Retained Earnings Total Equity $ $ $ 100,000 $ 7,928 $ 107,928 $ 100,000 (17,558) 82,442 Year 1 Results Revenue Chips Cookie Revenue 2019 2020 Boise Town Square Indvidual Units Box Units Total Cookies Cookie Prices Total Per Cookie $ 3.00 $ 3.00 $ 10.00 $ 2.50 43,543 23,074 135,839 40,497 21,983 128,429 Individual Box of 4 Individual Revenue Box Revenue Total Revenue $ 130,629 $ 121,491 $ 230,740 $ 219,830 $361,369 $ 341,321 Boise Spectrum Center Indvidual Units Box Units Total Cookies 47,437 26,908 155,069 43,483 24,974 143,379 Individual Revenue Box Revenue Total Revenue $ 142,311 $ 130,449 $ 269,080 $ 249,740 $ 411,391 $ 380,189 Vista Village Indvidual Units Box Units Total Cookies 45,983 27,143 154,555 42,446 25,252 143,454 Individual Revenue Box Revenue Total Revenue $ 137,949 $ 127,338 $ 271,430 $ 252,520 $ 409,379 $ 379,858 Total I 12 orn 12 A Total Indvidual Units Box Units Total Cookies 136,963 77,125 445,463 126,426 72,209 415,262 Individual Revenue Box Revenue Total Revenue $ 410,889 $ 379,278 $ 771,250 $ 722,090 $1,182,139 $ 1,101,368