Ruiz Generators is owned and operated by cousins, Luis and Carlos Ruiz. The company has been in operation for several years and manufactures small, portable gas-powered generators. The company has been quite successful over the past years but is experiencing a slow decline in profits , according to reports generated by the administrative staff. Carlos serves as the Chief Financial Officer for Ruiz Generators and Luis is Chief Operations Officer. A business manager/accountant was hired part-time to assist in carrying out the accounting and financial duties.
Ruiz Generators had been consistently reporting net profits over the years but a decline in profits over the past couple of quarters is quite noticeable. Luis and Carlos are troubled by this performance and believe they need an expert to review the company’s records and operations. They have retained your consulting firm to perform research and evaluation and are wanting recommendations that will improve and bring about a recovery of profitable operations. There is also a need for an improved cash flow management strategy.
Two distinct areas that you are investigating are manufacturing operations and cash flow management. Details are provided below for both areas.
PART ONE
Manufacturing and Operations
The newly hired business manager/accountant prepared the following income statement for the last quarter ended March 31, 2020:
Ruiz’s Generators, Inc.
Income Statement
For the First Quarter Ended March 31,2020
____________________________________________________________
Sales Revenue (8,100 gens @ $300/gen) $ 2,430,000
Operating Expenses:
Raw Material Purchases $ 895,000
Advertising expenses 270,000
Indirect labor 98,000
Direct Labor 570,000
Selling and Admin. Salaries 225,000
Utilities expense 72,000
Rent-Factory Building 180,000
Insurance expense 57,000
Depreciation-Factory Equipment 91,000
Depreciation-Sales Equipment 135,000
Total Operating Expenses (2,593,000)
NET INCOME (LOSS) $( 163,000)
Luis and Carlos are greatly disturbed by these reported results. The company had been consistently reporting profit in prior quarters. Consequently, they have retained you as a consultant and has asked you to review the income statement and recommend any needed corrections and adjustments.
You inquired and obtained the following additional data:
- Inventory Data
January 1 March 31
Raw Material $72,000 $106,000
Work-in-Progress 144,000 84,000
Finished Goods 135,000 288,000
- Sixty percent (60%) of the utility expense and seventy percent (70%) of the insurance expense are to be applied to the factory. The remaining amounts are to be considered selling and administrative expenses.
Based on your assessment, the following schedule and financial statement will be prepared and revised, respectively, in the proper format.
- A schedule of cost of good manufactured for the quarter ended March 31, 2020.
- A corrected multi-step income statement for the quarter ended March 31, 2020.
(See format in Exhibit #1)
PART TWO
Cash flow and Financing
Luis and Carlos believe that there is a need for better forecasting regarding the company’s cash inflows and outflows. After a series of questions and answers with the Ruizes, you determined that (1) the company has not prepared a cash budget for several quarters and (2) is not up to date on its payables and receivables. You are going to prepare a forecasted income statement and a forecasted cash budget for the fourth quarter. Pertinent information needed has been collected and is outlined below.
Pertinent Information:
The business manager/accountant and Luis provided projections pertaining to the 1st quarter (January through March 2020) and other information outlined below:
- Total sales 1st quarter 2020: 8,100 Generators; Sales price is $300/generator
- Total Sales for the 2nd quarter 2020 are projected to increase 5% above the 1st quarter total sales due to an aggressive marketing program that began March 1, 2020. Total quarter sales per month are expected to be realized as follows: 25% in April, 35% in May, and 40% in June. The sales budgets expressed in sales dollars and expressed in the number of generators sold are as follows:
| PROJECTED | April | May | June | TOTAL QTR |
| SALES REVENUE | ||||
| SALES | $637,875 | $893,025 | $1,020,600 | $2,551,500 |
| SALES: PRICE X QUANTITY | $637,875 | $893,025 | $1,020,600 | $2,551,500 |
| Number of Generators Sold | April | May | June | TOTAL QTR |
| Number of Generators Sold | 2,126 | 2,977 | 3,402 | 8,505 |
- Monthly Sales are classified as follows and realized in corresponding percentage:
a. Cash sales…………………………………….25% of total sales
b. Credit sales………………………………….75% of total sales
- Monthly credit sales are collected as follows and in the corresponding proportion:
a. Collected in the month of the sale, 37%
b. Collected one month after the sale month, 38%
c. Collected the second month after the sale month, 25%
- 5. Cost Classifications based on 1ST quarter information:
| Costs | Variable Costs | Fixed Costs |
| Raw Materials Used in Manufacturing (See corrected COGS Schedule in Part 1, Required #1) | $ ? | |
| Actual Costs on 3rd Quarter Income Statement | ||
| Direct Labor | 570,000 | |
| Factory Overhead: | ||
| Rent-Factory | $ 180,000 | |
| Indirect Labor | 98,000 | |
| Insurance – Factory (70%) | 39,900 | |
| Utility-Factory (60%) | 34,200 | 9,000 |
| Depreciation-factory building | 91,000 | |
| General Administrative | ||
| Advertising expense | 270,000 | |
| Selling & Administrative Wages and Salaries | 90,000 | 135,000 |
| Utility-Selling & Administrative (40%) | 25,200 | 3,600 |
| Insurance-Administrative (30%) | 17,100 | |
| Depreciation-Administrative | 135,000 | |
- All factory overhead and administrative expenses (except depreciation) are paid in cash in the month the cost is incurred.
- Direct labor is paid at the end of the month
- Raw material purchases are paid as follows: 50% in the month of the purchase, 30% the month after the purchase, and 20% in the second month following the purchase. The raw materials’ budget is as follows:
| PROJECTED | April | May | June | TOTAL QTR |
| RAW MATERIAL PURCHASES | ||||
| NEEDED FOR SALES | $198,975 | $278,565 | $318,360 | $795,900 |
| DESIRED ENDING | 49,744 | 69,641 | 79,590 | |
| LESS: BEGINNING | (106,000) | (49,744) | (69,641) | |
| PURCHASES | $142,719 | $298,463 | $328,309 | $769,490 |
- Additional monthly obligation paid in cash include:
- Property taxes, due April 27th, $3,500
- Employee payroll taxes due June 15th , $8,000,
You have determined that you are going to provide the following information to Luis and Carlos :
- a. Compute the unit cost of goods sold using 1ST quarter information and the corrected cost of goods sold statement you prepared in Part One.
- b. Prepare a projected traditional multi-step income statement for the 2ND quarter using information in “a,” above and the 1ST quarter information on the table in “5” above (see the previous page). For proper formatting, see Exhibit 1 at the end of this document.
- A schedule of collections from credit sales for each month of the 2nd quarter 2020.
Previous months’ credit sales are:
February 2020 credit sales, $2,225,000
March 2020 credit sales, $2,025,000
- A schedule of payment for raw materials for each month of the 2nd quarter 2020.
Previous months’ credit (on account) purchases:
February 2020 purchases on account, $935,700
March 2020 purchases on account, $842,130
- A forecasted cash budget for (a) the total 2nd quarter and (b) for each month in the 2nd quarter based on the information provided above.
The beginning cash balance on April 1, 2020 is $1,296,500
Additional presentation requirements:
- Prepare a formal report for the Ruizes that presents the requirement in Part one and Part two. You should use ONLY Microsoft WORD and EXCEL. Do not submit any pdf files.
- Be sure the report is ORGANIZED. That is, be sure the report is clearly presently and EASY for the Ruizes to ready and understand.
- You can have a separate WORD file for narrative (i.e., discussion and small tables) and a separate EXCEL file for large tables, schedules, statement, etc. Be sure that all tables, schedules, statements, etc., are clearly identified (e.g., name and/or number) and adequately referenced in the WORD file and letter when/if discussed.
- Your report should have a cover page.
- A brief letter indicating what is being submitted should accompany the report. The letter SHOULD NOT BE A PART OF THE REPORT. In the WORD document, put a blank page between the letter and the report.
- You have the option to work with one business associate (classmate). Together you should provide Luis and Carlos with a high-quality report and recommendations.
APPENDIX
EXHIBIT #1:
| Sales |
| Cost of Goods Sold |
| Gross Profit |
| Selling and Administrative: |
| Advertising |
| Selling/Admin. Salaries |
| Utility-Adm |
| Insurance |
| Depreciation- Admin. |
| Total Sell/Admin Expenses |
| Net Income (Loss) |
