Just 4 Kids Bill Travis owns two Just 4 Kids stores in Florence, South Carolina.
ID: 2455612 • Letter: J
Question
Just 4 Kids
Bill Travis owns two Just 4 Kids stores in Florence, South Carolina. He believes that the stores have been successful and he wants to open a new store in Sumter about 30 miles west of Florence. Bill has been in the retail line for over 20 years, and he worked at his uncle’s hobby shop while in high school and college before starting his own store at the age of 25.
Two big secrets to a successful toy store operation are good location and product selection. Bill’s first store is located in downtown Florence. Since Bill had been born and raised in Florence, he attracted a good customer base that remained loyal to his store after some of the giant chain related toy stores began to move into the area. About 10 years ago, Bill saw the change in customer shopping habits and purchased a second store near an interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area, and Bill could not totally rely on the “good old boy” market alone to sustain his market share. This second store catered to the younger more mobile generation that shopped at or near malls.
Bill now was looking into other markets. Sumter was not located on the interstate, but the area was growing because of its proximity to the state capital of Columbia, which was just 30 miles to its west. Bill believed that the people of Sumter who commuted to work in Columbia would prefer to limit their driving for shopping activities to the immediate Sumter area. Also, since Bill was a respected citizen of Florence, his reputation as an honest businessman had spread to Sumter. He believed he could quickly build up a new customer base in that location. The big chain type stores also did not seem as interested in the Sumter area, preferring instead to locate in the larger metropolitan areas of Columbia and Florence.
The appropriate toy items to feature in his stores were very important. Bill felt that his area of influence was strictly regional, and he did not have to carry much of the standard inventory of the national chain type of toy stores. His toy lines were more a reflection of local interest; thus NASCAR related items were hot sellers. Bill’s clientele also seemed interested in computer action games and a new line of Ya’ll talking dolls.
Bill went to the Florence National Bank to inquire about funding for the new store location. He had found an abandoned furniture store in downtown Sumter along Main Street that was up for sale for $280,000. The store seemed to be the right size and at a good location. A grocery store was in the same block with ample off street parking. Bill brought his balance sheet for the last two years and an income statement for the last operating year to the bank to support his request for a retail loan of $250,000. (Copies of the financial statements are listed at the end of the case.)
Nick Tightwad, the local bank loan vice president had been a friend of Bill’s for many years. He was a customer at Bill’s toy store on close out sales, and his bank had underwritten the funding for the second store. Nick was excited about Bill’s expansion goals and the prospect of another business loan with his friend. At the same time, Nick had to live up to his reputation. He was not about to approve a loan unless he was almost 100 percent sure that the borrower would not default. Bill’s past success had alleviated much of Nick’s concern, but he still wanted to complete a detailed analysis of the financial performance of Just 4 Kids during the last calendar year. Upon reviewing the balance sheet, Nick noticed a drop in cash during the last year even though Bill showed a strong profitable performance. The current financial statements did not seem to give enough information to answer Nick’s questions and he asked Bill to prepare a statement of cash flows for the year ending December 31, 20x7.
Just 4 Kids
Balance Sheet
December 31, 20x6
ASSETS
Cash
$ 38,500
Accounts Receivable
43,000
Inventory
126,000
Other Current Assets
17,500
Total Current Assets
$225,000
Land
$100,000
Furnishings, Fixtures & Vehicles
$150,000
Less Accumulated Depreciation
-30,000
Furnishings, Fixtures & Vehicles (net)
120,000
Building
400,000
Less Accumulated Depreciation
175,000
Building (net)
225,000
Total Long-Term Assets
445,000
Total Assets
$670,000
LIABILITIES
Accounts Payable
$ 57,500
Short-Term Notes Payable
20,000
Other Current Liabilities
13,000
Total Current Liabilities
$ 90,500
Long-Term Notes Payable
400,000
Total Liabilities
$490,500
EQUITIES
Capital
$100,000
Retained Earnings
79,500
Total Equities
$179,500
Total Liabilities and Equity
$670,000
Just 4 Kids
Income Statement
For the Year Ended December 31, 20x7
Sales Revenue
$600,000
Less Cost of Goods Sold
310,000
Gross Margin
290,000
Less Operating Expenses
Selling and Administrative
$106,200
Depreciation
20,000
Total Operating Expenses
126,200
Operating Income
163,800
Interest Expense
$50,000
Loss on Vehicle Sale
2,500
Total Other Expenses
52,500
Net Income Before Taxes
111,300
Less Income Taxes
39,300
Net Income
$72,000
Just 4 Kids
Balance Sheet
December 31, 20x7
ASSETS
Cash
$2,600
Accounts Receivable
71,000
Inventory
193,000
Other Current Assets
18,900
Total Current Assets
$285,500
Land
$100,000
Furnishings, Fixtures & Vehicles
$166,000
Less Accumulated Depreciation
-28,500
Furnishings, Fixtures & Vehicles (net)
137,500
Building
400,000
Less Accumulated Depreciation
190,000
Building (net)
210,000
Total Long-Term Assets
447,500
Total Assets
$733,000
LIABILITIES
Accounts Payable
$ 91,500
Short-Term Notes Payable
35,000
Other Current Liabilities
7,000
Total Current Liabilities
$133,500
Long-Term Notes Payable
388,000
Total Liabilities
$521,500
EQUITIES
Capital
$100,000
Retained Earnings
111,500
Total Equities
$211,500
Total Liabilities and Equity
$733,000
2. Analyze the performance of Just 4 Kids based on the financial statements.
ASSETS
Cash
$ 38,500
Accounts Receivable
43,000
Inventory
126,000
Other Current Assets
17,500
Total Current Assets
$225,000
Land
$100,000
Furnishings, Fixtures & Vehicles
$150,000
Less Accumulated Depreciation
-30,000
Furnishings, Fixtures & Vehicles (net)
120,000
Building
400,000
Less Accumulated Depreciation
175,000
Building (net)
225,000
Total Long-Term Assets
445,000
Total Assets
$670,000
LIABILITIES
Accounts Payable
$ 57,500
Short-Term Notes Payable
20,000
Other Current Liabilities
13,000
Total Current Liabilities
$ 90,500
Long-Term Notes Payable
400,000
Total Liabilities
$490,500
EQUITIES
Capital
$100,000
Retained Earnings
79,500
Total Equities
$179,500
Total Liabilities and Equity
$670,000
Explanation / Answer
Cash Flow statement of just 4 Kids for year ending December 31st, 20x7
Particulars Amount
Cash from Operating activities
Change in Retained Earnings $ 32,000
Add: Non cash expenses
Depriciation $ 20,000
Loss on vehicle $ 2,500
-----------------
Net Operating Income $ 54,500
Change in Current asset & Liabilities
Less Increase in Current assets ( Except Cash) $ 96,400
Add Increase in Current Liabilities $ 43,000
--------------------------
Net Cash flow from operating activities (a) $ 1,100
Cash from Investing Activities
Net Change in Furniture $ Fixture $25,000
Net cash used in Investing activities (b) ($25,000)
Cash from Financing Activities
Repayment of Long term Note payable $12,000
Net Cash Used in Financing activities (c) ($12,000)
---------------------------------
Net Change in Cash & Cash Equivalents (a+b+c) ($ 35,900)
Opening Cash & Cash equivalents $ 38,500
Closing Cash & Cash quivalents $ 2,600
2. Just 4 Kids is doing well as its profits are high , its current ratio is good that is 2.14 times , it is paying its long term payable on time and its profit margin is high to pay its interest expenses so it will be better to lend them money for its new venture.
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