Mary Helu and Randy Adams recently graduated from the same university. After gra

Question

Mary Helu and Randy Adams recently graduated from the same university. After graduation they decided not to seek jobs at established organizations but, rather, to start their own small business hoping they could have more flexibility in their personal lives for a few years. Mary's family has operated Mexican restaurants and taco-trucks for the past two generations, and Mary noticed there were no taco-truck services in the town where their university was located. To reduce the amount they would need for an initial investment, they decided to start a business operating a taco-cart rather than a taco-truck, from which they would cook and serve traditional Mexican-styled street food.

They bought a used taco-cart for $18,000. This cost, along with the cost for supplies to get started, a business license, and street vendor license brought their initial expenditures to $22,000. Five-thousand dollars came from personal savings they had accumulated by working part time during college, and they borrowed $17,000 from Mary's parents. They agreed to pay interest on the outstanding loan balance each month based on an annual rate of 5 percent. They will repay the principal over the next few years as cash becomes available. They were able to rent space in a parking lot near the campus they had attended, believing that the students would welcome their food as an alternative to the typical fast food that was currently available.

After two months in business, September and October, they had average monthly revenues of $25,000 and out-of-pocket costs of $22,000 for rent, ingredients, paper supplies, and so on, but not interest. Randy thinks they should repay some of the money they borrowed, but Mary thinks they should prepare a set of forecasted financial statements for their first year in business before deciding whether or not to repay any principal on the loan. She remembers a bit about budgeting from a survey of accounting course she took and thinks the results from their first two months in business can be extended over the next 10 months to prepare the budget they need. They estimate the cart will last at least four years, after which they expect to sell it for $6,000 and move on to something else in their lives. Mary agrees to prepare a forecasted (pro forma) income statement, balance sheet, and statement of cash flows for their first year in business, which includes the two months already passed.

Required

Prepare the annual pro forma financial statements that you would expect Mary to prepare based on her comments about her expectations for the business. Assume no principal will be repaid on the loan.

Review the statements you prepared for the first requirement and prepare a list of reasons why actual results for Randy and Mary's business probably will not match their budgeted statements.

Report three or more reasons for the company either exceeding or falling short of its budget.

Explanation / Answer

Budgeted Annual Financial statements (Based on the Mary expectations with No Principal will be repaid) Budgeted Income Statement Particulars Amount ( $ ) Annual Revenue ( $ 25,000 * 12 months) 300000 Less: Expenses Out of Pocket expenses ( $ 22,000 * 12 months) 264000 Interest on Loans (Total bought amount * 5 % per annuam) Taco-cart Bought amount - 18,000 Street Vendor License       - 22,000 Borrowed from Parents   - 17,000 Total Borrowings                - 57,000 2850 Depreciation (18000 total cost - 6000 solvage value) / 4 Years of Estimated Life 3000 Street Vendor License 22000 Net Income 8150 Budgeted Balance sheet as at Liabilities Amount ( $ ) Assets Amount ( $ ) Own Capital                                   5000 Taco Cart                             18,000 Add: Profit during the year     8,150 13150 Less: Depreciation             3000 15000 Borrowings Taco-cart Bought amount - 18,000 Cash 33150 Borrowed from Parents   - 17,000 35000 48150 48150 Reasons for actual results will not match with budgeted values 1) Randy compare only 2 month results but if u compare annual statements we need to incure some annual expenditures like depreciation 2) The business is majorly depends on the college working days , if college is holiday then business also get down.

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