SOLUTION TO MAJOR ASSIGNMENT PART I 40 MARKS

Apply your understanding of the relationships among the financial statements: Question 1 25 marks a) 5 mks Toronto Service Inc. Income Statement For the year ending December 31, 2008 Revenue Service Revenue Expenses Salary expense Rent expense Advertising expense Interest expense Property tax expense Total expenses Net Income b) 5mks Toronto Service Inc. Statement of Retained Earnings For the year ended December 31, 2008 Retained Earnings, January 1, 2008 Add: Net Income Less: Dividends Retained Earnings, December 31, 2008 $ 50,000 93,000 143,000 50,000 $ 93,000 $200,000 $85,000 3,000 10,000 4,000 5,000 107,000 $ 93,000

c)

7 mks Toronto Service Inc. Balance Sheet December 31, 2008 Assets Cash $10,000 Accounts receivable 25,000 Supplies 3,000 Furniture 20,000 Building 140,000 Land 98,000 Total Assets _______ $296,000 Liabilities Accounts payable $ 21,000 Salary payable 12,000 Note payable 95,000 Total Liabilities 128,000 Shareholders Equity Common Shares 75,000 Retained Earnings 93,000 Tot. Shareholders eq. 168,000 Tot. Liab. SE $296.000

d) 8 mks 1. The company was profitable in 2008. The Net Income was $93,000 (2 marks) 2. Retained Earnings increased by $43,000 (93,000 50,000) (2 marks) 3. Total equity is greater. The shareholders own more of the companys assets. (4 marks) Question 2 15 marks (3 marks each)

a. The single best source of cash for a business is usually from the businesss main operations. i.e. collecting cash from customers, whether it be cash sales or collections from credit sales( assuming sales are made on credit). This source of cash is best because it results from the core operating activity of the business. Collections from customers do not create liabilities that must be paid back to anyone. b. Paying large dividends will cause retained earnings to be low. c. Borrowing money, issuing (selling) shares to shareholders, and selling capital assets such as land, buildings and equipment can bring in cash even during a period when the company is experiencing losses. d. Large investing activities and paying off debts can result in a cash shortage even if net income has been high. High inventories and accounts receivable can also cause a cash shortage. e. You can finance the payment of the liabilities in a few ways: borrow money sell shares sell capital assets such as land, buildings & equipment

PART II 1 a.

40 MARKS

5 marks Training costs variable Managers salary fixed Admin. Staff fixed Training officer fixed Phone costs fixed Manuals variable Advertising fixed Postage & other misc. variable 5 marks Total variable costs = $729,450 Total Fixed costs = $435,000

1 b.

Contribution Margin Lost (if closed) $470,550 (1,200,000 729,450) Savings in Fixed Costs 395,000 Loss to whole company $ 75,550 2. 10 marks Total Fixed cost including allocation = $435,000 + 120,000 = $555,000 Contribution Margin per participant = $470,550 = $117.54 4000* 200 workshops with 20 individuals in each No. of participants to break even = $555,000/ 117.54 = 4722 participants No of classes to break even at 20 participants in each class: 4722/20 = 236 classes approx. 3. 10 marks Reduction in variable costs = $200,000 ( 600,000 400,000) New variable costs = 729,450 200,000 = $529,450 New Contribution Margin = $1,200,000 529,450 = 670,550 CM per participant = 670,550/4000 = $167.53 Break even point in participants = 555,000/167.53 = 3,313 participants Break even point in classes = 3313/20 = 166 classes approx. 4. 10 marks Increase in Revenue Less Increase in VC Trainers 100,000 Manuals 22,500 Less allocated cost Impact on profit $300,000 (100 x 15 x $200)

122,500 177,500 30,000 $147500 increase