You work for the Plains State Bank as an analyst specializing in the financial statements of small businesses seeking loans from the bank. Digit Retail Enterprises Inc. provides you with its balance sheet for December 31, 2012 and 2013 (Exhibit 6.21), and its income statement for 2013 (Exhibit 6.22). Digit Retail Enterprises, Inc., acquired no new property, plant, and equipment during the year.

$$\begin{array}{lcc} &\textbf{Digit Retail Enterprises, Inc.}\\ &\textbf{Balance Sheet}\\ &\textbf{(Problem 33)}\\ &&\textbf{December}&\textbf{December}\\ &&\textbf{31, 2013}&\textbf{31, 2012}\\ \text{ASSETS}\\ \textbf{Current Assets}\\ \text{Cash}&&\$ 50,000&\$ 36,000\\ \text{Accounts Receivable}&&38,000&23,000\\ \text{Notes Receivable}&&—&7,500\\ \text{Interest Receivable}&&—&100\\ \text{Merchandise Inventory}&&65,000&48,000\\ \text{Prepaid Insurance}&&12,000&9,000\\ \text{Prepaid Rent}&&—&\underline{2,000}\\ \quad\text{Total Current Assets}&&\underline{\$165,000}&\underline{\$125,600}\\ \textbf{Property, Plant, and Equipment}&&&\\ \text{At Cost}&&\$ 90,000&\$100,000\\ \text{Less Accumulated Depreciation}&&\underline{(35,000)}&\underline{(20,000)}\\ \text{Net}&&\underline{\$ 55,000}&\underline{\$ 80,000}\\ \quad\text{Total Assets}&&\underline{\underline{\$220,000}}&\underline{\underline{\$205,600}}\\ \\ \text{LIABILITIES AND SHAREHOLDER’S EQUITY}\\ \textbf{Current Liabilities}\\ \text{Accounts Payable—Merchandise Suppliers}&&\$ 20,000&\$ 18,000\\ \text{Salaries Payable}&&2,800&2,100\\ \text{Rent Payable}&&3,000&—\\ \text{Advances from Customers}&&6,100&8,500\\ \text{Note Payable}&&5,500&—\\ \text{Dividends Payable}&&2,600&4,200\\ \text{Other Current Liabilities}&&\underline{3,700}&\underline{1,300}\\ \quad\text{Total Current Liabilities}&&\underline{\$ 43,700}&\underline{\$ 34,100}\\ \textbf{Shareholders’ Equity}&&&\\ \text{Common Stock}&&\$164,500&\$160,000\\ \text{Retained Earnings}&&11,800&11,500\\ \text{Total Shareholders’ Equity}&&\underline{\$176,300}&\underline{\$171,500}\\ \text{Total Liabilities and Shareholders' Equity}&&\underline{\underline{\$220,000}}&\underline{\underline{\$205,600}}\\ \end{array}$$

$$\begin{array}{lr} &\textbf{Digit Retail Enterprises, Inc.}\\ &\textbf{Balance Sheet}\\ &\textbf{(Problem 33)}\\ &&\textbf{December}&\textbf{December}\\ \text{Sales Revenue}&\$270,000\\ \text{Gain on Sale of Property, Plant, and Equipment}&3,200\\ \text{Interest Revenue}&\underline{200}\\ \quad\text{Total Revenues}&\underline{\$273,400}\\ \textbf{Less Expenses:}&\\ \text{Cost of Goods Sold}&\$145,000\\ \text{Salaries Expense}&68,000\\ \text{Rent Expense}&12,000\\ \text{Insurance Expense}&5,000\\ \text{Depreciation Expense}&20,000\\ \text{Other Expenses}&\underline{13,800}\\ \quad\text{Total Expenses}&\underline{\$263,800}\\ \text{Net Income}&\underline{\underline{\$ 9,600}}\\ \end{array}$$

g. Calculate the amount of dividends paid during 2013.

Betty owns a small store. The store has been losing money for some time. Because she is the sole owner of the business, her personal assets are at risk. Explain to Betty the differences among Chapters 7, 11 , and 13 bankruptcies. Which type of bankruptcy would you recommend and why?

The exercise describes a number of business ventures. Determine the break-even point. Describe what this means. A company that manufactures small canoes has a fixed cost of $18,000. It costs$20 to produce each canoe. The selling price is $80 per canoe. (In solving this exercise, let x represent the number of canoes produced and sold.)

Students in an introductory physics lab are producing a region of the uniform electric field by applying a voltage to two 20 -cm diameter aluminum plates separated by $2.5 \mathrm{~cm}$. They connect the two plates to the two terminals of a high-voltage power supply and then gradually turn up the voltage. In such a situation, sparks start to fly when the field exceeds $3 \times 10^6 \mathrm{~V} / \mathrm{m}$. What is the highest voltage the students can use?

Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its investors. The company went bankrupt, Patterson did some jail time, and Helm lost everything.

Requirements

1. What was the key control weakness in this case?
2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

CarryALL, Inc., makes and sells small cargo trailers to individuals and small businesses. Since its opening in 1990, it has allocated indirect costs (IDC) to its three manufacturing plants based on direct materials cost per unit. Each plant builds different models and sizes. Because of advances in automation and materials, Judy, the CFO, plans to use build-time per unit as the new basis. Build-time is the average number of work-hours to complete a trailer. However, she initially wants to determine what the allocation would have been this year had the build-time basis been used prior to the incorporation of new technology and materials. The data shown below represents average costs and times. Use this data and the bases indicated to determine the allocation rates and IDC allocation of $1,000,000 for this year for the three bases.$

$$\begin{array}{lcccc} \text { Plant } & \text { New York } & \text { Virginia } & \text { Tennessee } & \text { Total } \\ \hline \text { Direct material cost, } & 20,000 & 12,700 & 18,600 & 51,300 \\ \text { \$ per unit } & & & & \\ \text { Previous build-time } & 400 & 415 & 580 & 1395 \\ \text { per unit, work-hours } & & & & \\ \text { New build-time per } & 425 & 355 & 480 & 1260\\ \text { unit, work-hours } & & & & \\ \hline \end{array}$$

$

A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity; but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Unable to deliver on orders, the company became so strapped for cash that employee paychecks began to bounce. Finally, out of cash, the company ceased operations entirely 3 years later.

The Grandmother Calendar Company clearly had a cash flow problem. In the context of the cash flow analysis we developed in Chapter 2, what was the impact of customers not paying until orders were shipped?

Use the following information to answer the following question: A small business called The Grandmother Calendar Company began selling personalized photo calendar kits. The kits were a hit, and sales soon sharply exceeded forecasts. The rush of orders created a huge backlog, so the company leased more space and expanded capacity; but it still could not keep up with demand. Equipment failed from overuse and quality suffered. Working capital was drained to expand production, and, at the same time, payments from customers were often delayed until the product was shipped. Unable to deliver on orders, the company became so strapped for cash that employee paychecks began to bounce. Finally, out of cash, the company ceased operations entirely three years later.

If the firm was so successful at selling, why wouldn’t a bank or some other lender step in and provide it with the cash it needed to continue?

In 2007, some members of Congress introduced a bill that would ensure "net neutrality." The bill would prevent Internet service providers from charging fees to Web sites in order to run at higher speeds. Industry members and consumer interest groups clashed over the bill. Document B. " [Without a net neutrality law,] Internet service providers would be free to block or impede any online content or services, for any reason. They could also charge websites or applications for 'priority service,' practically assuring that any site that couldn't or wouldn't pay their fees would no longer work as well or be as easy to find. That could spell the end of innovation, as small businesses, entrepreneurs, local governments, nonprofits and others would be locked out of a system controlled by the big telephone and cable companies. If network providers are allowed to control the flow of information, the open and freewheeling nature of the Internet could be lost." According to Document B, a "net neutrality" bill is necessary to ensure A. unlimited access to Web sites. B. low prices. C. expanded broadband service. D. consumer safety.

Presented below are five independent situations.

(b) Al Bolt, a college student looking for summer employment, opened a bait shop in a small shed at a local marina.

Instructions

In each case, explain what form of organization the business is likely to take—sole proprietorship, partnership, or corporation. Give reasons for your choice.

The simplest cost function is the linear cost function, $C(x) = mx + b$, where the y-intercept b represents the fixed costs of operating a business and the slope m represents the cost of each item produced. Suppose that a small bicycle manufacturer has daily fixed costs of $1800 and each bicycle costs$90 to manufacture. Graph the model.

You start a small bee-keeping business, spending $\$ 500$ for equipment and bees. You figure it will cost $\$ 1.25$ per pound to collect, clean, bottle, and label the honey. How many pounds of honey must you produce before your average cost per pound is $\$ 1.79$?

What are some determinants of business risk?