ting income statement for the company for the last quarter is given below: Superior Markets, Incorporated Income
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Superior Markets, Incorporated, operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:
| Superior Markets, Incorporated Income Statement For the Quarter Ended September 30 |
||||
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Sales | $ 3,720,000 | $ 892,800 | $ 1,488,000 | $ 1,339,200 |
| Cost of goods sold | 2,054,928 | 499,968 | 818,400 | 736,560 |
| Gross margin | 1,665,072 | 392,832 | 669,600 | 602,640 |
| Selling and administrative expenses: | ||||
| Selling expenses | 1,013,080 | 286,936 | 390,600 | 335,544 |
| Administrative expenses | 474,920 | 131,440 | 187,116 | 156,364 |
| Total expenses | 1,488,000 | 418,376 | 577,716 | 491,908 |
| Net operating income (loss) | $ 177,072 | $ (25,544) | $ 91,884 | $ 110,732 |
The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:
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The breakdown of the selling and administrative expenses that are shown above is as follows:
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Selling expenses: | ||||
| Sales salaries | $ 296,360 | $ 86,800 | $ 110,360 | $ 99,200 |
| Direct advertising | 231,880 | 63,240 | 89,280 | 79,360 |
| General advertising* | 55,800 | 13,392 | 22,320 | 20,088 |
| Store rent | 372,000 | 105,400 | 148,800 | 117,800 |
| 19,840 | 5,704 | 7,440 | 6,696 | |
| Delivery salaries | 26,040 | 8,680 | 8,680 | 8,680 |
| Depreciation of delivery equipment | 11,160 | 3,720 | 3,720 | 3,720 |
| Total selling expenses | $ 1,013,080 | $ 286,936 | $ 390,600 | $ 335,544 |
*Allocated on the basis of sales dollars.
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Administrative expenses: | ||||
| Store managers' salaries | $ 86,800 | $ 26,040 | $ 37,200 | $ 23,560 |
| General office salaries* | 62,000 | 14,880 | 24,800 | 22,320 |
| Insurance on fixtures and inventory | 31,000 | 9,300 | 11,160 | 10,540 |
| Utilities | 131,440 | 38,440 | 49,600 | 43,400 |
| Employment taxes | 70,680 | 20,460 | 27,156 | 23,064 |
| General office—other* | 93,000 | 22,320 | 37,200 | 33,480 |
| Total administrative expenses | $ 474,920 | $ 131,440 | $ 187,116 | $ 156,364 |
*Allocated on the basis of sales dollars.
-
The lease on the building housing the North Store can be broken with no penalty.
-
The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
-
The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $13,640 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,880 per quarter. All other managers and employees in the North store would be discharged.
-
The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $4,960 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
-
The company pays employment taxes equal to 15% of their employees' salaries.
-
One-third of the insurance in the North Store is on the store’s fixtures.
-
The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Incorporated If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $7,440 per quarter.
Required:
1. How much employee salaries will the company avoid if it closes the North Store?
2. How much employment taxes will the company avoid if it closes the North Store?
3. What is the financial advantage (disadvantage) of closing the North Store?
4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?
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Superior Markets, Incorporated, operates three stores in a large metropolitan area. A segmented absorption costing income statement for the company for the last quarter is given below:
| Superior Markets, Incorporated Income Statement For the Quarter Ended September 30 |
||||
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Sales | $ 3,720,000 | $ 892,800 | $ 1,488,000 | $ 1,339,200 |
| Cost of goods sold | 2,054,928 | 499,968 | 818,400 | 736,560 |
| Gross margin | 1,665,072 | 392,832 | 669,600 | 602,640 |
| Selling and administrative expenses: | ||||
| Selling expenses | 1,013,080 | 286,936 | 390,600 | 335,544 |
| Administrative expenses | 474,920 | 131,440 | 187,116 | 156,364 |
| Total expenses | 1,488,000 | 418,376 | 577,716 | 491,908 |
| Net operating income (loss) | $ 177,072 | $ (25,544) | $ 91,884 | $ 110,732 |
The North Store has consistently shown losses over the past two years. For this reason, management is giving consideration to closing the store. The company has asked you to make a recommendation as to whether the store should be closed or kept open. The following additional information is available for your use:
-
The breakdown of the selling and administrative expenses that are shown above is as follows:
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Selling expenses: | ||||
| Sales salaries | $ 296,360 | $ 86,800 | $ 110,360 | $ 99,200 |
| Direct advertising | 231,880 | 63,240 | 89,280 | 79,360 |
| General advertising* | 55,800 | 13,392 | 22,320 | 20,088 |
| Store rent | 372,000 | 105,400 | 148,800 | 117,800 |
| Depreciation of store fixtures | 19,840 | 5,704 | 7,440 | 6,696 |
| Delivery salaries | 26,040 | 8,680 | 8,680 | 8,680 |
| Depreciation of delivery equipment | 11,160 | 3,720 | 3,720 | 3,720 |
| Total selling expenses | $ 1,013,080 | $ 286,936 | $ 390,600 | $ 335,544 |
*Allocated on the basis of sales dollars.
| Total | North Store | South Store | East Store | |
|---|---|---|---|---|
| Administrative expenses: | ||||
| Store managers' salaries | $ 86,800 | $ 26,040 | $ 37,200 | $ 23,560 |
| General office salaries* | 62,000 | 14,880 | 24,800 | 22,320 |
| Insurance on fixtures and inventory | 31,000 | 9,300 | 11,160 | 10,540 |
| Utilities | 131,440 | 38,440 | 49,600 | 43,400 |
| Employment taxes | 70,680 | 20,460 | 27,156 | 23,064 |
| General office—other* | 93,000 | 22,320 | 37,200 | 33,480 |
| Total administrative expenses | $ 474,920 | $ 131,440 | $ 187,116 | $ 156,364 |
*Allocated on the basis of sales dollars.
-
The lease on the building housing the North Store can be broken with no penalty.
-
The fixtures being used in the North Store would be transferred to the other two stores if the North Store were closed.
-
The general manager of the North Store would be retained and transferred to another position in the company if the North Store were closed. She would be filling a position that would otherwise be filled by hiring a new employee at a salary of $13,640 per quarter. The general manager of the North Store would continue to earn her normal salary of $14,880 per quarter. All other managers and employees in the North store would be discharged.
-
The company has one delivery crew that serves all three stores. One delivery person could be discharged if the North Store were closed. This person’s salary is $4,960 per quarter. The delivery equipment would be distributed to the other stores. The equipment does not wear out through use, but does eventually become obsolete.
-
The company pays employment taxes equal to 15% of their employees' salaries.
-
One-third of the insurance in the North Store is on the store’s fixtures.
-
The “General office salaries” and “General office—other” relate to the overall management of Superior Markets, Incorporated If the North Store were closed, one person in the general office could be discharged because of the decrease in overall workload. This person’s compensation is $7,440 per quarter.
Required:
1. How much employee salaries will the company avoid if it closes the North Store?
2. How much employment taxes will the company avoid if it closes the North Store?
3. What is the financial advantage (disadvantage) of closing the North Store?
4. Assuming that the North Store's floor space can’t be subleased, would you recommend closing the North Store?
5. Assume that the North Store's floor space can’t be subleased. However, let's introduce three more assumptions. First, assume that if the North Store were closed, one-fourth of its sales would transfer to the East Store, due to strong customer loyalty to Superior Markets. Second, assume that the East Store has enough capacity to handle the increased sales that would arise from closing the North Store. Third, assume that the increased sales in the East Store would yield the same gross margin as a percentage of sales as present sales in the East store. Given these new assumptions, what is the financial advantage (disadvantage) of closing the North Store?
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