Continuing Cookie Chronicle (1)

CCC1 Natalie Koebel spent much of her childhood learning the art of cookie-making from her grandmother. They spent many happy hours mastering every type of cookie imaginable and later devised new recipes that were both healthy and delicious. Now at the start of her second year in college, Natalie is investigating possibilities for starting her own business as part of the entrepreneurship program in which she is enrolled.

A long-time friend insists that Natalie has to include cookies in her business plan. After a series of brainstorming sessions, Natalie settles on the idea of operating a cookie-making school. She will start on a part-time basis and offer her services in people’s homes. Now that she has started thinking about it, the possibilities seem endless. During the fall, she will concentrate on holiday cookies. She will offer group sessions (which will probably be more entertainment than education) and individual lessons. Natalie also decides to include children in her target market. The first difficult decision is coming up with the perfect name for her business. She settles on “Cookie Creations,” and then moves on to more important issues.

Instructions

(a) What form of business organization—proprietorship, partnership, or corporation— do you recommend that Natalie use for her business? Discuss the benefits and weaknesses of each form that Natalie might consider.

(b) Will Natalie need accounting information? If yes, what information will she need and why? How often will she need this information?

(c) Identify specific asset, liability, revenue, and expense accounts that Cookie Creations will likely use to record its business transactions.

(d) Should Natalie open a separate bank account for the business? Why or why not?

(e) Natalie expects she will have to use her car to drive to people’s homes and to pick up supplies, but she also needs to use her car for personal reasons. She recalls from her first-year accounting course something about keeping business and personal assets separate. She wonders what she should do for accounting purposes. What do you recommend?

(Note: This is a continuation of the Cookie Chronicle from Chapter 1.)

CCC2 After investigating the different forms of business organization, Natalie Koebel decides to operate her business as a corporation, Cookie Creations Inc., and she begins the process of getting her business running.

While at a trade show, Natalie is introduced to Gerry Richards, operations manager of “Biscuits,” a national food retailer. After much discussion, Gerry asks Natalie to consider being Biscuits’ major supplier of oatmeal chocolate chip cookies. He provides Natalie with the most recent copy of the financial statements of Biscuits. He expects that Natalie will need to supply Biscuits’ Watertown warehouse with approximately 1,500 dozen cookies a week. Natalie is to send Biscuits a monthly invoice, and she will be paid approximately 30 days from the date the invoice is received in Biscuits’ Chicago office.

Natalie is thrilled with the offer. However, she has recently read in the newspaper that Biscuits has a reputation for selling cookies and donuts with high amounts of sugar and fat, and as a result, consumer demand for the company’s products has decreased.

Instructions

Natalie has several questions. Answer the following questions for Natalie.

(a) What type of information does each financial statement provide?

(b) What financial statements would Natalie need in order to evaluate whether Biscuits will have enough cash to meet its current liabilities? Explain what to look for.

(c) What financial statements would Natalie need in order to evaluate whether Biscuits will be able to survive over a long period of time? Explain what to look for.

(d) What financial statement would Natalie need in order to evaluate Biscuits’ profitability? Explain what to look for.

(e) Where can Natalie find out whether Biscuits has outstanding debt? How can Natalie determine whether Biscuits would be able to meet its interest and debt payments on any debts it has?

(f) How could Natalie determine whether Biscuits pays a dividend?

(g) In deciding whether to go ahead with this opportunity, are there other areas of concern that Natalie should be aware of?

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 6.)

CCC7 Part 1 Natalie is struggling to keep up with the recording of her accounting transactions. She is spending a lot of time marketing and selling mixers and giving her cookie classes. Her friend John is an accounting student who runs his own accounting service. He has asked Natalie if she would like to have him do her accounting.

John and Natalie meet and discuss her business. John suggests that he do the following for Natalie.

1. Hold onto cash until there is enough to be deposited. (He would keep the cash locked up in his vehicle). He would also take all of the deposits to the bank at least twice a month.

2. Write and sign all of the checks.

3. Record all of the deposits in the accounting records.

4. Record all of the checks in the accounting records.

5. Prepare the monthly bank reconciliation.

6. Transfer all of Natalie’s manual accounting records to his computer accounting program. John maintains all of the accounting information that he keeps for his clients on his laptop computer.

7. Prepare monthly financial statements for Natalie to review.

8. Write himself a check every month for the work he has done for Natalie.

(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 7.)

CCC8 One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit.

Natalie comes to you for advice and asks the following questions.

1. “Curtis has provided me with a set of his most recent financial statements. What calculations should I do with the data from these statements, and how will the results help me decide if I should extend credit to Curtis?”

2. “Is there an alternative other than extending credit to Curtis for 30 days?”

3. “I am thinking seriously about permitting my customers to use credit cards. What are some of the advantages and disadvantages of letting my customers pay by credit card?”

The following transactions occurred in June through August.

June. 1 After much thought, Natalie sells a mixer to Curtis on credit, terms n/30, for $1,100 (cost of mixer $600).

2 Natalie meets with the bank manager and arranges to get access to a credit card account. The terms of credit card transactions are 3% of the sales transactions and a monthly equipment rental charge of $75.

30 Natalie teaches 13 classes in June. Seven classes were paid for in cash, $1,050; the other six classes were paid for by credit card, $900.

30 Natalie receives and reconciles her bank statement. She makes sure that the bank has correctly processed the monthly $75 charge for the rental of the credit card equipment and the 3% fee on the credit card transactions.

30 Curtis calls Natalie. He is unable to pay the amount outstanding for another month, so he signs a one-month, 6% note receivable.

July. 15 Natalie sells a mixer to a friend of Curtis’s. The friend pays $1,100 for the mixer by credit card (cost of mixer $600).

30 Natalie teaches 16 classes in July. Eight classes are paid for in cash, $1,200; eight classes are paid for by credit card, $1,200.

31 Natalie reconciles her bank statement and makes sure the bank has recorded the correct amounts for the rental of the credit card equipment and the credit card sales.

31 Curtis calls Natalie. He cannot pay today but hopes to have a check for her at the end of the week. Natalie prepares the appropriate journal entry.

Aug. 10 Curtis calls again and promises to pay at the end of August, including interest for 2 months.

31 Natalie receives a check from Curtis in payment of his balance plus interest outstanding.

Instructions

(a) Answer Natalie’s questions.

CCC11 Natalie and her friend Curtis Lesperance decide that they can benefit from joining Cookie Creations and Curtis’s coffee shop. In the first part of this problem, they come to you with questions about setting up a corporation for their new business. In the second part of the problem, they want your help in preparing financial information following the first year of operations of their new business, Cookie & Coffee Creations.

CCC11 Part 1 Curtis has operated his coffee shop for 2 years. He buys coffee, muffins, and cookies from a local supplier. Natalie’s business consists of giving cookie-making classes and selling fine European mixers. The plan is for Natalie to use the premises Curtis currently rents to give her cookie-making classes and demonstrations of the mixers that she sells. Natalie will also hire, train, and supervise staff to bake the cookies and muffins sold in the coffee shop. By offering her classes on the premises, Natalie will save on travel time going from one place to another. Another advantage is that the coffee shop will have one central location for selling the mixers.

The current market values of the assets of both businesses are as follows.

Curtis’s Coffee Cookie Creations

Cash $7,500 $11,630

Accounts receivable 100 800

Inventory 450 1,200

Equipment 2,500 1,000*

*Cookie Creations decided not to buy the delivery van considered in Chapter 9.

Combining forces will also allow Natalie and Curtis to pool their resources and buy a few more assets to run their new business venture.

Curtis and Natalie then meet with a lawyer and form a corporation on November 1, 2015, called Cookie & Coffee Creations Inc. The articles of incorporation state that there will be two classes of shares that the corporation is authorized to issue: common shares and preferred shares. They authorize 100,000 no-par shares of common stock, and 10,000 no-par shares of preferred stock with a $0.50 noncumulative dividend.

The assets held by each of their businesses will be transferred into the corporation at current market value. Curtis will receive 10,550 common shares, and Natalie will receive 14,630 common shares in the corporation. Therefore, the shares have a fair value of $1 per share.

Natalie and Curtis are very excited about this new business venture. They come to you with the following questions:

1. “Curtis’s dad and Natalie’s grandmother are interested in investing $5,000 each in the business venture. We are thinking of issuing them preferred shares. What would be the advantage of issuing them preferred shares instead of common shares?”

2. “Our lawyer has sent us a bill for $750.When we discussed the bill with her, she indicated that she would be willing to receive common shares in our new corporation instead of cash for her services. We would be happy to issue her shares, but we’re a bit worried about accounting for this transaction. Can we do this? If so, how do we determine how many shares to give her?”

Instructions

(a) Answer their questions.

Chapter 3 and 12 Problems

3-30 Even though independent gasoline stations have been having a difficult time, Susan Solomon has been thinking about starting her own independent gasoline station. Susan’s problem is to decide how large her station should be. The annual returns will depend on both the size of her station and a number of marketing factors related to the oil industry and demand for gasoline. After a careful analysis, Susan developed the following table:

SIZE OF FIRST STATION	GOOD MARKET ($)	FAIR MARKET ($)	POOR MARKET ($)
Small	50,000	20,000	–10,000
Medium	80,000	30,000	–20,000
Large	100,000	30,000	–40,000
Very large	300,000	25,000	–160,000

For example, if Susan constructs a small station and the market is good, she will realize a profit of $50,000.

a. Develop a decision table for this decision.

b. What is the maximax decision?

c. What is the maximin decision?

d. What is the equally likely decision?

e. What is the criterion of realism decision? Use an α value of 0.8.

f. Develop an opportunity loss table.

g. What is the minimax regret decision?

3-40 Bill Holliday is not sure what he should do. He can build a quadplex (i.e., a building with four apartments), build a duplex, gather additional information, or simply do nothing. If he gathers additional information, the results could be either favorable or unfavorable, but it would cost him $3,000 to gather the information. Bill believes that there is a 50–50 chance that the information will be favorable. If the rental market is favorable, Bill will earn $15,000 with the quadplex or $5,000 with the duplex. Bill doesn’t have the financial resources to do both. With an unfavorable rental market, however, Bill could lose $20,000 with the quadplex or $10,000 with the duplex. Without gathering additional information, Bill estimates that the probability of a favorable rental market is 0.7. A favorable report from the study would increase the probability of a favorable rental market to 0.9. Furthermore, an unfavorable report from the additional information would decrease the probability of a favorable rental market to 0.4. Of course, Bill could forget all of these numbers and do nothing. What is your advice to Bill?

3-41 Peter Martin is going to help his brother who wants to open a food store. Peter initially believes that there is a 50–50 chance that his brother’s food store would be a success. Peter is considering doing a market research study. Based on historical data, there is a 0.8 probability that the marketing research will be favorable given a successful food store. Moreover, there is a 0.7 probability that the marketing research will be unfavorable given an unsuccessful food store.

a. If the marketing research is favorable, what is Peter’s revised probability of a successful food store for his brother?

b. If the marketing research is unfavorable, what is Peter’s revised probability of a successful food store for his brother?

c. If the initial probability of a successful food store is 0.60 (instead of 0.50), find the probabilities in parts (a) and (b).

12-13 Mike Dreskin manages a large Los Angeles movie theater complex called Cinema I, II, III, and IV. Each of the four auditoriums plays a different film; the schedule is set so that starting times are staggered to avoid the large crowds that would occur if all four movies started at the same time. The theater has a single ticket booth and a cashier who can maintain an average service rate of 280 movie patrons per hour. Service times are assumed to follow an exponential distribution. Arrivals on a typically active day are Poisson distributed and average 210 per hour.

To determine the efficiency of the current ticket operation, Mike wishes to examine several queue operating characteristics.

a. Find the average number of moviegoers waiting in line to purchase a ticket.

b. What percentage of the time is the cashier busy?

c. What is the average time that a customer spends in the system?

d. What is the average time spent waiting in line to get to the ticket window?

e. What is the probability that there are more than two people in the system? More than three people? More than four?

12-15 The wheat harvesting season in the American Midwest is short, and most farmers deliver their truckloads of wheat to a giant central storage bin within a 2-week span. Because of this, wheat-filled trucks waiting to unload and return to the fields have been known to back up for a block at the receiving bin. The central bin is owned cooperatively, and it is to every farmer’s benefit to make the unloading/storage process as efficient as possible. The cost of grain deterioration caused by unloading delays, the cost of truck rental, and idle driver time are significant concerns to the cooperative members. Although farmers have difficulty quantifying crop damage, it is easy to assign a waiting and unloading cost for truck and driver of $18 per hour. The storage bin is open and operated 16 hours per day, 7 days per week, during the harvest season and is capable of unloading 35 trucks per hour according to an exponential distribution. Full trucks arrive all day long (during the hours the bin is open) at a rate of about 30 per hour, following a Poisson pattern.

To help the cooperative get a handle on the problem of lost time while trucks are waiting in line or unloading at the bin, find the

a. average number of trucks in the unloading system.

b. average time per truck in the system.

c. utilization rate for the bin area.

d. probability that there are more than three trucks in the system at any given time.

e. total daily cost to the farmers of having their trucks tied up in the unloading process.

The cooperative, as mentioned, uses the storage bin only two weeks per year. Farmers estimate that enlarging the bin would cut unloading costs by 50% next year. It will cost $9,000 to do so during the off-season. Would it be worth the cooperative’s while to enlarge the storage area?

12-24 Billy’s Bank is the only bank in a small town in Arkansas. On a typical Friday, an average of 10 customers per hour arrives at the bank to transact business. There is one single teller at the bank, and the average time required to transact business is 4 minutes. It is assumed that service times can be described by the exponential distribution. Although this is the only bank in town, some people in the town have begun using the bank in a neighboring town about 20 miles away. If a single teller at Billy’s is used, find

a. the average time in the line.

b. the average number in the line.

c. the average time in the system.

d. the average number in the system.

e. the probability that the bank is empty.

12-25 Refer to the Billy’s Bank situation in  Problem 12-24 . Billy is considering adding a second teller (who would work at the same rate as the first) to reduce the waiting time for customers, and he assumes that this will cut the waiting time in half. A single line would be used, and the customer at the front of the line would go to the first available bank teller. If a second teller is added, find

a. the average time in the line.

b. the average number in the line.

c. the average time in the system.

d. the average number in the system.

e. the probability that the bank is empty.