Q1: How might Hynes and the investors use the profit plan in managing the business? Ans: The profit plan prepared by Hynes can be helpful in forecasting the financial position (assets and liabilities) of the business. This would assist Hynes and investors to plan the business in advance and improve on profits. The information can be used to determine the solvency of the business by showing how much assets are available for payment of liabilities and dividends.
Profit plan can also help in predicting the progress of the business and ascertain the amount of capital employed in business. It can prove as a good tool for budgeting and can uncover many potential bottlenecks before they occur. Hynes and investors may use the profit plan to decide on goals and objectives that can serve as benchmark for evaluating subsequent performance. Q2: How might the projected transactions impact the company’s balance sheet? (Think about each transaction in terms of its impact on both the basic accounting equation and specific accounts. Ans: Each of the projected transactions from the case study have been filled out in the worksheet (see following page) designed based on the basic accounting equation, Assets = Liability + Owner’s Equity. Q3: Prepare a profit plan in the form of an income statement for the first year of operations. Ans: INCOME STATEMENT FOR PROJECTED ONE YEAR OF OPERATIONS Sales$ 598,500. 00 Cost of Goods Sold Manufacturing Costs$ (62,000. 00) Payroll Costs$(145,000. 00) Equipment Depreciation Costs$ (8,500. 00) Inventory Costs$(197,000. 0)$(412,500. 00) Gross Income$ 186,000. 00 Selling, General & Administrative Costs$ (63,000. 00) Incorporation Costs$ (2,500. 00) Equipment Upgrade Cost$ (25,000. 00) Patent Fee$ (20,000. 00) Operating Profit$ 75,500. 00 Loan Interest$ (500. 00) Profit before taxes$ 75,000. 00 Taxes$ (22,500. 00) Net Income$ 52,500. 00 Q4: Prepare a balance sheet as of the end of the first year of operations. Ans: PROJECTED BALANCE SHEET (END OF THE YEAR) ASSETS Cash $ 78,400. 00 Inventory $ 15,100. 00 Equipment $ 85,000. 00
Less: Accumulated Depreciation $ (8,500. 00) $ 76,500. 00 Patent $ 120,000. 00 Less: Patent Depreciation $ (20,000. 00) $100,000. 00 Accounts Receivable $ – TOTAL ASSETS $270,000. 00 LIABILITIES Interest Payable $ – Accounts Payable $ 22,500. 00 Loans Payable $ – TOTAL LIABILITIES $ 22,500. 00 EQUITY Stocks $200,000. 00 Retained Earnings $ 47,500. 00 TOTAL EQUITY $247,500. 00 LIABILITIES AND EQUITY $270,000. 00 Q5: Hynes made a number of accounting decisions. Do you agree with these decisions?
Ans: The given data suggests that Hynes made some of the accounting decisions based on his following three estimates viz. value of his patent (60% of capital stock), patent life (6 year period) and life of the equipment (10 years with no salvage value). I agree to all the decisions made by Hynes as he is the subject matter expert and believe all the estimates he made are to the best of his knowledge. While the patent’s legal life is 16 years, the technology advancements can reduce the effective life of patent to 6 years and is a fair assumption.