Michael V.

Baylosis MBA 204 December 5, 2015

Case 6-1
Browning Manufacturing Company

1.
a. Browning Manufacturing Company
Projected Balance Sheet
December 31, 2006

Assets

Current assets

Cash and marketable securities $ 443,640

Accounts receivable, net 201,360

Inventories:

Materials $ 124,520

Work in process 210,448

Finished goods 352,368

Supplies 22,080

Prepaid taxes and insurance 91,920 801,336

Total current assets 1,446,336

Other assets

Manufacturing plant 2,822,400

Less: Accumulated depreciation 1,047,600 1,774,800

Total Assets $ 3,221,136

Liabilities and equity

Current liabilities

Accounts payable $ 288,360

Notes payable 552,840

Income taxes payable 5,800

Total current liabilities $ 847,000

Shareholders equity

Capital stock 1,512,000

Retained earnings 862,136 2,374,136

Total liabilities and equity $ 3,221,136

Michael V. Baylosis MBA 204 December 5, 2015

b. Browning Manufacturing Company

Projected Statement of Cost of Goods Sold
For the Year Ended December 31, 2006
Finished goods, $ 257,040
beginning

Work in process, $ 172,200

beginning

Materials used 811,000

Plus: Factory expenses

Direct labor 492,000

Factory overhead

Indirect labor $ 198,000

Power, heat, & light 135,600

Social security taxes 49,200

Depreciation 140,400

Taxes and insurance 52,800

Supplies 61,200 637,200

2,112,400

Less: Work in process, 210,448

end

Cost of goods 1,901,952

manufactured

2,158,992

Less: Finished goods, 352,368

end

Cost of goods sold $ 1,806,624

Michael V. Baylosis MBA 204 December 5, 2015

c. Browning Manufacturing Company

Projected Income Statement
For the Year Ended December 31, 2006
Sales $ 2,562,000

Sales returns and allowances $ 19,200

Sales discounts 49,200 68,400

Net sales 2,493,600

Less: Cost of goods sold 1,806,624

Gross margin 686,976

Less: selling and administrative 522,000

expense

Operating income 164,976

Less: interest expense 38,400

Income before federal income tax 126,576

Less: estimated income tax 58,000

expense

Net income $ 68,576

2. 2006 performance improved in terms of decreasing its accounts receivable, which is most
probably a result of better collection system. The company decreased its income tax liability for 2006,
as well. Sales increased for 2006, perhaps as a result of increase in selling and administrative
expense and investment in new non-current asset. Though the percentage increase in selling and
administrative expense (19.40%) does not cover the increase in sales (11.60%).

While there are commendable improvements, there seems to be many aspects of its operations that
failed to improve in 2006.

For one, the company is still liquid though its current ratio has decreased from 2.18 in 2005 to 1.71
in 2006. With regards to its inventory turnover, it decreased from 6.1 in 2005 to 5.12 in 2006. It has
also greatly increased its liabilities, thereby increasing creditors interest in the company.

3. No, Browning will not be able to accomplish this. To be able to accomplish this goal, Browning
must have cash more than what it has based on projection. What the company can do is to look at
its inventory, the turnover of which declined in 2006. They should predict the demand of their product
and from this, anticipate the cost they will put into purchasing their materials and into expending for
conversion costs. Its ending finished goods balance in 2006 is far greater than what it had for 2005.
The cash was tied up to inventory when it should have allocated that for paying off notes payable if
it was their objective.

4. Because the turnover did not improve for 2006, Browning has two options to improve the turnover.
Because inventory turnover is the ratio of cost of goods sold to average inventory, Browning has two
options:
a. Reduce average inventory
Michael V. Baylosis MBA 204 December 5, 2015
This can be done by anticipating the demand for their product, thereby minimising excess inventory
unsold by the end of the year. Failure to anticipate the demand for their product accurately may lead
to oversupplying of inventory, which will affect the turnover negatively. The company can also reduce
ending inventory by looking for cheaper sources of their raw materials, labor, and overhead if
possible.

b. Increase cost of goods sold

This can be done by increasing the demand for their product by tapping into marketing initiatives.
On a financial side, the company can look into reducing its markup rate on the sales price of their
products.

5. The trade credit standing will definitely be affected because of the increase in both accounts and
notes payable. Because the firm is considerably liquid, the credit standing of Browning will still be
in a somewhat good condition. This is, of course, judging by the figures alone. It would be better if
the ability of Browning to make interest payments for its notes payables would also be given
consideration in order to provide a complete picture of its credit standing. Its improved collection
system, as inferred from a decreased accounts receivable may be attractive to creditors. This does
not come without caution, however because around 26% of the capital in the business is funded by
liabilities.
Michael V. Baylosis MBA 204 December 5, 2015

Case 14-1
Quick Lunch

1.
a. Quick Lunch
Balance Sheet
December 31, 2002

Assets

Cash $ 12,265

Food and supplies 750

Prepaid licenses (Note 1) 150

Prepaid rent 3,800

Equipment $ 8,800

Less: Accumulated depreciation 293 8,507

(Note 2)

Total assets $ 25,472

Liabilities & equity

Accounts payable $ 890

Rent payable 1,515

Estimated premium liability (Note 1,375

3)

Owners Capital (Note 4) 21,692

Total liabilities & equity $ 25,472

Note 1: Prepaid license

(225/12) x 8 months

Note 2: Accumulated depreciation

(8,800/10 years x 4 months/12 months)
10 years was derived from Internal Revenue Manual

Note 3: Estimated premium liability

($3,850/140) x ($1,500/$30)

Note 4: Owners Capital

10,300 + 5,150 + 10,042 - 3,800 = 21,692
Michael V. Baylosis MBA 204 December 5, 2015

b. Quick Lunch
Income Statement
For the Year Ended December 31, 2002

Sales (Note 5) $ 31,790

Rent expense (Note 6) 6,875

Food expense (Note 7) 14,415

Depreciation expense 293

Licenses (Note 8) 75

Operating expense 90 21,748

Net income $ 10,042

Note 5: Sales
29,315 + 2,475 = 31,790
90 x $27.5 = $2,475

Note 6: Rent expense

3,460 + 1,515 = 4,975
(5,700/12) x (4/12) = 1,900
4,975 + 1,900 = 6,875

Note 7: Food expense

14,275 + 890 - 750 = 14,415

Note 8: Licenses
(225/12) x 4
Michael V. Baylosis MBA 204 December 5, 2015

c. Quick Lunch
Statement of Cash Flows
For the Year Ended December 31, 2002

Cash flow from investing

activities

Cash investment $ 5,150

Sale of equipment 400

Purchase of equipment (4,600)

Net cash flows from investing $950

activities

Cash flow from operating

activities

Sales 33,165

Purchase of food and supplies (14,275)

Taxes and licenses (225)

Rent (3,460)

Operating expenses (90)

Net cash flow from operating 15,115

activities

Cash flow from financing

activities

Withdrawal by owner -3,800

Cash $ 12,265

In preparing the financial statements, attention was drawn to the value assigned for the coupon
books because the figures provided made use of the fair value when it should have used the selling
price instead.

Also, there was a dispute as to whether or not the proceeds from sale of equipment will be included
in the computation of 15% of gross receipts for rent expense. However working back the figures for
the rent expense the past four months reveal that only the gross receipts from normal operations
was used as basis.

2. From the four months of operations revealed so far, it appears that the capital investment of the
owners can be quickly recovered. What is noticeable from the financial statements formulated above
is that there is excess cash which may be used to invest in marketable securities or in investing
toward additional equipment or, most importantly, to pay all its outstanding liabilities.