The Awesome Products Business ValuationCase
Awesome is a small closely held company operating in the UnitedStates. Assume you are in the early stages of preparing a businessvaluation on Awesome Products to assist a potential purchaser.
Included in the case is a copy of Awesome Products, Inc.Unadjusted Income Statement and Balance Sheet and Operating Expensedetail for the periods ending December 31st; all numbers are inthousands. All questions on this case use the attached data asbasis.
Instructions: Complete each of the exercises.
1. Based on the information given, prepare the normalizationentries for the years 2010 - 2014. Explain your reasons for eachnormalization entry.
2. Using the data you created in #1,
a. Prepare normalized and common size balance sheets for eachyear from 2010 - 2014
b. Prepare a normalized and common size income statement foreach year from 2010 - 2014.
Information needed for normalizationentries
You have discovered the following information after reviewingthe financial statements and other company documents, andinterviewing management.
1. Net Sales
During the period 2010 through 2014, the company has expandedtheir product line and opened new stores. This caused the increasein sales during this period. An analysis of the information showsthe following:
Year Number of NewStores Increase in Sales
20111 20%
2012 2
2013 0
2014 2 10%
2. Cost of Sales
Products purchased from the same supplier. Different cost ofsales percentages, due to different product lines.
3. Salaries and Wages
Generally, the increase in salary expense was caused by hiringadditional employees to work in the new stores. Included in theaccount, Officers' Compensation, is the salary of the owner, GeorgeBigshot. His salary for the 5 year period has been:
2010
- $375,000
2011
- $400,000
2012
- $475,000
2013
- $500,000
2014
- $535,000
You have compared his salary to industry data, and the amount hereceives appears to be high. His compensation appears to be 15%above the industry norm. June Bigshot is an employee and earns$35,000 per year recorded in Other Salaries & Wages. Frominterviews and physical observation, it does not appear that shehas any responsibilities and is rarely at the business location.When Awesome opened the last 2 stores in 2014, they hiredexperienced managers. Each of these manager's earn $5,000 more thanthe managers in the other stores, this amount appears to be $3,000above the norm in the industry.
4. Selling Expenses
This category includes numerous expense items. The Advertisingand Promotion category is significantly higher in 2014 compared toprevious years. The marketing manager told you Awesome redesignedall their literature in 2014. The cost of the design work andprinting costs was $550,000.
After careful analysis, you notice that the Travel andEntertainment category has increased steadily since 2010. Afterasking questions, you discover personal trips that were paid for bythe company. The annual amount for these trips, is as follows: 2012= $80,259; 2013 = $120,000; and 2014 = $200,000.
Other Selling Expenses, includes expenses for a condo owned bythe company. The condo was acquired in 2010, and was capitalized asan Investment on the Balance Sheet (see Investments below). Thecompany has incurred $20,000 per year for the upkeep of the condofrom 2010 - 2014. Also, in this category there is$23,000 in 2013and $500,000 in 2012 related to an employee strike. The strike wassettled and management does not anticipate any strikes in thefuture. Related to the strike the legal fees to handle thesituation were $100,500 in 2013 and$80,750 in 2012. The legal feeswere included in the General & Administrative section.
5. General & Administrative
The insurance account has increased significantly. Most of theadditional cost is due to the opening of the new stores. However,there is $10,000 per year of property insurance on the condo, and$12,500 per year of real estate taxes for the condo. The two storesopened in 2014 are in a specialty area, and the rent paid issignificantly higher than the other stores. The rent for each ofthese stores is$48,000 per year, and the average rent for the otherstores is $30,000 per year. The use of office supplies appears tobe very inconsistent. The amount fluctuates greatly from year toyear, but you could not find any reason for this. In each year,that new stores were opened, the company took the maximum deductionfor Section 179 expenses of $18,500. This amount is recorded in theDepreciation Section. Under normal circumstances these assets wouldbe depreciated over a 5 year period using straight linedepreciation.
6. Investments
The condominium was acquired in 2010 for $190,000. Thecondominium was depreciated on the straight line basis over 30years, starting at the beginning of 2010 with the land valued at$10,000. The balance in the Investment account was reducedaccordingly, instead of showing accumulated depreciation and thedepreciation expense was recorded in Other Expenses under theGeneral & Administrative category. The balance in theInvestment account represents stock that Mr. Bigshot trades on aregular basis. No gains or losses were incurred on theseinvestments.
7. Dividends
Dividends of $100,000 were paid in 2011.
8. Advances from Affiliates
This account represents funds borrowed from another companyowned by Mr. Bigshot. Awesome pays a fair rate of interest on thefunds borrow
Awesome Products ii' 0.1 SCHEDULE 1 Preparer'sName Awesome Products Unadjusted Balance Sheets '
The Awesome Products Business ValuationCase
Awesome is a small closely held company operating in the UnitedStates. Assume you are in the early stages of preparing a businessvaluation on Awesome Products to assist a potential purchaser.
Included in the case is a copy of Awesome Products, Inc.Unadjusted Income Statement and Balance Sheet and Operating Expensedetail for the periods ending December 31st; all numbers are inthousands. All questions on this case use the attached data asbasis.
Instructions: Complete each of the exercises.
1. Based on the information given, prepare the normalizationentries for the years 2010 - 2014. Explain your reasons for eachnormalization entry.
2. Using the data you created in #1,
a. Prepare normalized and common size balance sheets for eachyear from 2010 - 2014
b. Prepare a normalized and common size income statement foreach year from 2010 - 2014.
Information needed for normalizationentries
You have discovered the following information after reviewingthe financial statements and other company documents, andinterviewing management.
1. Net Sales
During the period 2010 through 2014, the company has expandedtheir product line and opened new stores. This caused the increasein sales during this period. An analysis of the information showsthe following:
Year Number of NewStores Increase in Sales
20111 20%
2012 2
2013 0
2014 2 10%
2. Cost of Sales
Products purchased from the same supplier. Different cost ofsales percentages, due to different product lines.
3. Salaries and Wages
Generally, the increase in salary expense was caused by hiringadditional employees to work in the new stores. Included in theaccount, Officers' Compensation, is the salary of the owner, GeorgeBigshot. His salary for the 5 year period has been:
2010 | - $375,000 |
2011 | - $400,000 |
2012 | - $475,000 |
2013 | - $500,000 |
2014 | - $535,000 |
You have compared his salary to industry data, and the amount hereceives appears to be high. His compensation appears to be 15%above the industry norm. June Bigshot is an employee and earns$35,000 per year recorded in Other Salaries & Wages. Frominterviews and physical observation, it does not appear that shehas any responsibilities and is rarely at the business location.When Awesome opened the last 2 stores in 2014, they hiredexperienced managers. Each of these manager's earn $5,000 more thanthe managers in the other stores, this amount appears to be $3,000above the norm in the industry.
4. Selling Expenses
This category includes numerous expense items. The Advertisingand Promotion category is significantly higher in 2014 compared toprevious years. The marketing manager told you Awesome redesignedall their literature in 2014. The cost of the design work andprinting costs was $550,000.
After careful analysis, you notice that the Travel andEntertainment category has increased steadily since 2010. Afterasking questions, you discover personal trips that were paid for bythe company. The annual amount for these trips, is as follows: 2012= $80,259; 2013 = $120,000; and 2014 = $200,000.
Other Selling Expenses, includes expenses for a condo owned bythe company. The condo was acquired in 2010, and was capitalized asan Investment on the Balance Sheet (see Investments below). Thecompany has incurred $20,000 per year for the upkeep of the condofrom 2010 - 2014. Also, in this category there is$23,000 in 2013and $500,000 in 2012 related to an employee strike. The strike wassettled and management does not anticipate any strikes in thefuture. Related to the strike the legal fees to handle thesituation were $100,500 in 2013 and$80,750 in 2012. The legal feeswere included in the General & Administrative section.
5. General & Administrative
The insurance account has increased significantly. Most of theadditional cost is due to the opening of the new stores. However,there is $10,000 per year of property insurance on the condo, and$12,500 per year of real estate taxes for the condo. The two storesopened in 2014 are in a specialty area, and the rent paid issignificantly higher than the other stores. The rent for each ofthese stores is$48,000 per year, and the average rent for the otherstores is $30,000 per year. The use of office supplies appears tobe very inconsistent. The amount fluctuates greatly from year toyear, but you could not find any reason for this. In each year,that new stores were opened, the company took the maximum deductionfor Section 179 expenses of $18,500. This amount is recorded in theDepreciation Section. Under normal circumstances these assets wouldbe depreciated over a 5 year period using straight linedepreciation.
6. Investments
The condominium was acquired in 2010 for $190,000. Thecondominium was depreciated on the straight line basis over 30years, starting at the beginning of 2010 with the land valued at$10,000. The balance in the Investment account was reducedaccordingly, instead of showing accumulated depreciation and thedepreciation expense was recorded in Other Expenses under theGeneral & Administrative category. The balance in theInvestment account represents stock that Mr. Bigshot trades on aregular basis. No gains or losses were incurred on theseinvestments.
7. Dividends
Dividends of $100,000 were paid in 2011.
8. Advances from Affiliates
This account represents funds borrowed from another companyowned by Mr. Bigshot. Awesome pays a fair rate of interest on thefunds borrow
| Awesome Products | |||||||||||||||||||||
| ii' | 0.1 | SCHEDULE 1 | Preparer'sName | ||||||||||||||||||
| Awesome Products | |||||||||||||||||||||
| Unadjusted Balance Sheets | |||||||||||||||||||||
| ' | |||||||||||||||||||||
Related questions
| Presentedbelow are the 2011 income statement and comparative balance | |||||||
| sheet for Siegfried & Royce. | |||||||
| Siegfried & Royce | |||||||
| Income Statement | |||||||
| For the Year Ended December 31, 2011 | |||||||
| ($ inthousands) | |||||||
| Sales revenue | $12,500 | ||||||
| Operating expenses: | |||||||
| Cost of goods sold | 7300 | ||||||
| Depreciation | 400 | ||||||
| Rent | 250 | ||||||
| Administrative and other | 2200 | ||||||
| Total operating expenses | 10,150 | ||||||
| Income before income taxes | 2,350 | ||||||
| Income tax expense | 940 | ||||||
| Net income | $1,410 | ||||||
| Balance Sheet information ($ in thousands) | Dec. 31, 2011 | Dec. 31, 2010 | |||||
| Assets: | |||||||
| Cash | $3,280 | $1,300 | |||||
| Accounts receivable | 1,250 | 980 | |||||
| Inventory | 980 | 900 | |||||
| Prepaid rent | 150 | 100 | |||||
| Plant & equipment | 3,000 | 2,600 | |||||
| Less: Accumulated depreciation | -1,200 | -800 | |||||
| Totalassets | $7,460 | $5,080 | |||||
| Liabilities and shareholdersâ equity: | |||||||
| Accounts payable | $500 | $580 | |||||
| Payables for administrative and other expenses | 650 | 700 | |||||
| Income taxes payable | 450 | 350 | |||||
| Note payable (due 12/31/2012) | 2,500 | 2,000 | |||||
| Common stock | 1,500 | 1,000 | |||||
| Retained earnings | 1,860 | 450 | |||||
| Totalliabilities and shareholdersâ equity | $7,460 | $5,080 | |||||
Required: Prepare a Statement of Cash Flows using the directmethod for operating activities. Assume that all purchases andsales of inventory are on account, and that there are noanticipated bad debts for accounts receivable.
TIP: Use T accounts for the pertinent items toisolate the information for the statement
The segmented income statement for XYZ Company for the yearended December 31, 2010, follows:
| XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010 | ||||||||||||
| Total Company | Product A | Product B | Product C | |||||||||
| Sales | $ | 1,200,000 | $ | 600,000 | $ | 240,000 | $ | 360,000 | ||||
| Variableexpenses | 552,000 | 300,000 | 108,000 | 144,000 | ||||||||
| Contributionmargin | $ | 648,000 | $ | 300,000 | $ | 132,000 | $ | 216,000 | ||||
| Fixedexpenses | $ | 564,000 | 328,000 | 92,000 | 144,000 | |||||||
| Operatingincome | $ | 84,000 | $ | (28,000 | ) | $ | 40,000 | $ | 72,000 | |||
| | | | | | | | | | | | | |
The company is concerned about theperformance of product A, and you have been asked to analyze thesituation and recommend to the president whether to continue ordiscontinue the product. During your investigation, you discoverthat certain fixed expenses are traceable directly to each productline as indicated here: |
| Total Company | Product A | Product B | Product C | |||||||
| Direct fixed expenses | $204,000 | $148,000 | $20,000 | $36,000 | ||||||
The remaining fixed expenses areconsidered to be corporatewide expenses that have been allocated toeach product line based on sales revenue. |
| Required: |
| (a) | What will be the effect of thedecision to discontinue product A on operating income?(Input the amount as positivevalue. Omit the "$" sign in your response.) |
| Operating incomewill by $ for the XYZ Company if it discontinues Product A. |
| (b) | Assume that product A isdiscontinued. Prepare a segmented income statement for theremaining products. Allocate corporatewide fixed expenses asdescribed. (Input all amounts aspositive values except operating losses which should be indicatedby a minus sign. Omit the "$" sign in yourresponse.) |
| XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010 | |||
| Total Company | Product B | Product C | |
| Sales | $ | $ | $ |
| Variableexpenses | |||
| Contributionmargin | $ | $ | $ |
| Direct fixedexpenses | |||
| Common fixedexpenses | |||
| Operatingincome/loss | $ | $ | $ |
| | | | |
| (c) | Starting with the segmented incomestatement, use the information you discovered during yourinvestigation to present a more appropriately designed segmentedincome statement. (Input the amountas positive value. Omit the "$" sign in yourresponse.) |
| XYZ COMPANY Segmented Income Statement For the Year Ended December 31, 2010 | ||||
| Total Company | Product A | Product B | Product C | |
| Sales | $ | $ | $ | $ |
| Variableexpenses | ||||
| Contributionmargin | $ | $ | $ | $ |
| Direct fixedexpenses | ||||
| Segmentmargin | $ | $ | $ | $ |
| | | | ||
| Common fixedexpenses | ||||
| $ | ||||
| | ||||
I need help answering A, B, C and Dplease!
Instructions
(You may want to set up T accounts to determine endingbalances.)
(a) Prepare journal entries for thetransactions listed above and adjusting entries.
(b) Prepare a General Ledger usingthe following format:
| Gerenal Ledger | ||||||||||||||
| Cash | Accounts Receivable | Merchandise Inventory | Supplies | Equipment | ||||||||||
| Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit |
| Accounts Payable | Salaries Payable | Income Tax Payable | Common Stock | Retained Earnings | ||||||||||
| Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit | Date | Debit | Credit |
| Sales | Sales Discounts | |||||||||||||
| Date | Debit | Credit | Date | Debit | Credit | |||||||||
(c) Prepare an adjusted trial balanceat December 31, 2010.
Totals $671,350
(d) Closing Entries are againREQUIRED
Use the following information to complete A, B and C:
Hiatt Corporation's balance sheet at December 31, 2009, ispresented below.
HIATT CORPORATION
Balance Sheet
December 31, 2009
Cash $ 24,600 Accounts payable $ 25,600
Accounts receivable 45,500 Common stock ($10 par) 80,000
Allowance for doubtful accounts (1,500) Retained earnings127,400
$233,000
Supplies 4,400
Land 40,000
Building 142,000
Accumulated depreciation-building (22,000)
$233,000
During 2010, the following transactions occurred.
1. On January 1, 2010, Hiatt issued 1,500 shares of $20 par, 7%preferred stock for $33,000.
2. On January 1, 2010, Hiatt also issued 900 shares of the $10 parvalue common stock for $21,000.
3. Hiatt performed services for $280,000 on account.
4. On April 1, 2010, Hiatt collected fees of $36,000 in advance forservices to be performed from April 1, 2010, to March 31,2011.
5. Hiatt collected $267,000 from customers on account.
6. Hiatt bought $35,100 of supplies on account.
7. Hiatt paid $32,200 on accounts payable.
8. Hiatt reacquired 400 shares of its common stock on June 1, 2010,for $38 per share.
9. Paid other operating expenses of $188,200.
10. On December 31, 2010, Hiatt declared the annual preferred stockdividend and a $1.20 per share dividend on the outstanding commonstock, all payable on January 15, 2011.
11. An account receivable of $1,300 which originated in 2009 iswritten off as uncollectible.
Adjustment data:
1. A count of supplies indicates that $5,900 of supplies remainunused at year-end.
2. Recorded revenue earned from item 4 above.
3. The allowance for doubtful accounts should have a balance of$3,500 at year end.
4. Depreciation is recorded on the building on a straight-linebasis based on a 30-year life and a salvage value of $10,000.
5. The income tax rate is 30%. (Hint: Prepare the income statementup to income before taxes and multiply by 30% to compute theamount.)
