Refer to the value chain of PCC. For each activity, determine the financial transactions. Remember, the value chain transactions will be asset-based (equipment), accumulating cost data, and liability based (accounts payable).

References: Farm (Fm), Transport to Plat (T), Warehouse Potatos (W), Factory (F) (include Wash, Peel, Slice, Fry, Flavour, and Package potatos), Distribution (D), Retailers (R)

 

Example of Financial Transactions

Fm

T

W

F

D

R

Sales goods - cash

x

x

x

x

x

x

Purchase goods - cash

x

x

x

x

x

x

Purchase merchandise - payable

x

x

x

x

x

x

Purchase services - payable

x

x

x

x

x

x

Payment by external entities under awards

x

x

x

x

x

x

Cash from sales of chattels/equipment

x

x

x

x

x

x

Cash from sales of real properties

x

x

x

x

x

x

Cash from sales of Intangible properties

x

x

x

x

x

x

Proceeds received from insurance entities related to property and casualty losses

x

x

x

x

x

x

Account payables (check)

x

x

x

x

x

x

Purchases on credit

x

x

x

x

x

X

Payment on account payable

x

x

x

x

x

X

Payment on account receivable

x

x

x

x

x

x

Asset deterioration

x

x

x

x

x

x

Asset appreciation

x

x

x

x

x

x

Salaries

x

x

x

x

x

x

Sales tax or other taxes are collected

x

x

x

x

x

x

a tax obligation

x

x

x

x

x

x

Inventory lost or stolen

x

x

x

x

x

x

Prepaid expenses

x

x

x

x

x

x

Buys chattels/equipment at long term

x

x

x

x

x

x

Buys real properties at long term

x

x

x

x

x

x

Buys Intangible properties at long term

x

x

x

x

x

x

Account payable – long term

x

x

x

x

x

x

Account receivable

x

x

x

x

x

x

Retained earnings

x

x

x

x

x

x

Stock emission

x

x

x

x

x

x

Advertising

 

 

 

 

 

x

Supplies

x

x

x

x

x

x

Utilities

x

x

x

x

x

x

Purchase equipment

x

x

x

x

x

x

Prepaid insurance

x

x

x

x

x

x

General expenses

x

x

x

x

x

x

 

 

Using the financial transactions you determined in Activity 1, allocate these transactions into the appropriate category in the balance sheet and income statement. (This activity is intended to give you insights into the accounting system and not to attempt to identify all possible accounting transactions.)

 

 

Balance Sheet

 

 

Current Assets

Fixed Assets

Merchandise

Equipment

Intangible Assets

Sales goods - cash

x

 

 

 

 

Purchase goods - cash

x

 

 

 

 

Payment by external entities under awards

x

 

 

 

 

Cash from sales of chattels/equipment

x

x

 

x

 

Cash from sales of real properties

x

x

 

 

 

Cash from sales of Intangible properties

x

 

 

 

x

Proceeds received from insurance entities related to property and casualty losses

x

 

 

 

 

Asset deterioration

 

x

 

 

 

Asset appreciation

 

x

 

 

 

Inventory lost or stolen

 

 

 

 

 

Purchase merchandise – payable

 

 

x

 

 

Purchase equipment

x

 

 

x

 

Prepaid expenses

x

 

 

 

 

Payment on account payable by cash

x

 

 

 

 

Payment on account receivable - cash

x

 

 

 

 

Prepaid insurance

x

 

 

 

 

Account receivable

x

 

 

 

 

 

 

 

Current Liabilities

Long-term liabilities

Owner equity

Purchase services - payable

x

 

 

Account payables (check)

x

 

 

Purchases on credit

x

 

 

Purchase merchandise - payable

x

 

 

Payment on account payable

x

 

 

Buys chattels/equipment at long term

 

x

 

Buys real properties at long term

 

x

 

Buys Intangible properties at long term

 

x

 

Account payable – long term

 

x

 

Retained earnings

 

 

x

Stock emission

 

 

x

 

 

Income Statement

 

 

taxes

Miscellaneous expenses

Operating expenses

Administrative expenses

Salaries

 

 

x

x

Sales tax or other taxes are collected

x

 

 

 

a tax obligation

x

 

 

 

Inventory lost or stolen

 

 

x

x

Asset deterioration

 

 

x

x

General expenses

 

x

 

 

Advertising

 

 

x

 

Supplies

 

 

 

x

Utilities

 

 

 

x

 

 

 

Revenues

Goods sold

Merchandise inventory

Sales goods

x

 

x

Purchase goods

x

 

X

Purchases

 

x

x

Inventory lost or stolen

 

x

x

 

 

Using the value chain activities for PCC, develop a budget for the major balance sheet and income statement items.  Do this only for one year. Focus on the balance sheet assets and liabilities. We will not consider changes in the owner’s equity in this activity.

 

 

PCC Inc.

Budgeted Income Statement

For the Year Ended December 31, 2010

Sales (10,000,000 units at $2)

$20,100,000

Less: sales return and allowances

100,000

Net Sales

$20,000,000

Cost of good sold

 

Inventory beginning

1,200,000

 

Merchandise purchased

10,100,000

 

Good available for sales

11,300,000

 

Inventory Ending

1,300,000

 

Cost of good sold

10,000,000

Gross Margin

10,000,000

Less selling and administrative expenses

 

Salaries expense

3,000,000

 

Rent expense

1,500,000

 

Utilities expense

500,000

 

Advertising expense

500,000

 

Insurance expense

500,000

 

Interest expense

500,000

 

Other expense

500,000

 

Total Operative expenses

7,000,000

Operative Income

3,000,000

Other revenue

100,000

 

Other expenses

100,000

 

Net Income before income taxes

3,000,000

Income taxes expense (30%)

900,000

Net Income

2,100,000

 

 

 

PCC Inc.

Budgeted Balance Sheet

December 31, 2010

Assets

Current Assets

 

 

Cash

$2,000,000

 

Accounts receivable

4,000,000

 

Raw material inventory

700,000

 

Finished goods inventory

200,000

 

Prepaid insurance

100,000

 

Total current assets

 

$ 7,000,000

Plant and equipment:

 

 

Land

19,000,000

 

Building and equipment

12,000,000

 

Accumulated depreciation

(1,000,000)

 

Plant and equipment, net

 

30,000,000

Total assets

 

$ 37,000,000

Liability and Shareholders’ Equity

Current liability

 

 

Accounts payable (raw material)

 

1,000,000

Notes payable

 

 4,000,000

Mortgage payable

 

1,000,000

Total current liabilities

 

 $ 6,000,000

Long-term liabilities

 

 

Mortgage payable

 

 $ 5,000,000

 

 

 

Shareholders’ equity

 

 

Common shares, ($20 par)

 21,000,000

 

Retained earnings

5,000,000

 

Total shareholders’ equity

 

26,000,000

Total liabilities and shareholders’ equity

 

$ 37,000,000

 

 

 

Focus on the revenue and major cost items in the income statement.  Using the ratios from your lesson materials, apply the short-term solvency ratios, long-term solvency ratios, profitability ratios, and activity ratios for PCC. Use data you generated from your balance sheet and income statement.

 

See ratios definition in the book.

 

Short-term solvency ratios

        Current ratio = 7,000,000 / 6,000,000 = 1.17

        Current Capital = 7,000,000 – 6,000,000 = 1,000,000

 

Long-term solvency ratios

        Debt-to-owners’ – Equity ratio = 11,000,000 / 16,000,000 = 0.69

 

Profitability ratios

        Return on Equity = 2,100,000 / 26,000,000 = 8.08%

        Earning per share = 2,100,000 / 1,050,000 = $2.00

 

Activity ratios

        Inventory turnover ratio = 10,000,000 / (1,200,000 + 1,300,000) * 2 = 8 times or 45.6 days