Adanna Ghany is the founder and CEO of Ceramics Unlimited. Adanna has approached the local bank for a loan to expand her business. As part of the loan application, Adanna was asked to prepare financial statements for the business. She prepared the following balance sheet and income statement based on the first month of operations (see below).

Unlimited pottery.

BALANCE SHEET

November 30, 2019

Money	$ 1,400		Equity	$ 1,400
	$ 1,400			$ 1,400

Unlimited pottery.

STATEMENT OF INCOME

For the month ending November 30, 2019

Sales		$4,400
Rent	$300
Oven	4500	4.800
Net Income		($400)

Adanna said she was not satisfied with the first month's results. But she believes that she will make a bigger profit next month, since she won't have big expenses on items like buying a new oven.

In conversations with Adanna and reviewing Ceramics Unlimited's accounting records, she discovers the following facts

1. Adanna opened Ceramics Unlimited (a ceramics studio) on November 1, 2019 in rented office space, paying the first month's rent of $300 and a security deposit of $1,000 with a check drawn on her personal account.

1. Ceramics Unlimited sells pottery and offers training courses that teach participants how to make their own pottery.

2. Adanna had been making pottery as a hobby. She took approximately $7,500 worth of molds and tools from her house to begin the study.

3. Adanna also bought a new oven to start the business. The new furnace had a list price of $5,000. Adanna wrote a check on his personal checking account.

1. The first Ceramics Unlimited customer paid a total of $1,400 to attend classes for two months. Adanna opened a checking account in the company's name with the $1,400.

4. Ceramics Unlimited has been teaching classes for a month and has sold some ceramics for $3,000 cash. The cost incurred in the elaboration of the ceramic pieces was $1,000. Adanna paid these costs with her personal credit card.

As a person to decide whether or not to grant Adanna the requested loan. You must decide whether Adanna properly prepared the financial statements for Ceramics Unlimited. You must determine whether you violated any accepted accounting principles, assumptions, or concepts.

Required

to. Justify Adanna's treatment of each event and her preparation of the financial statements based on her understanding of generally accepted accounting principles.

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b. Identify the generally accepted accounting principles, assumptions, or concepts that were violated.

Yo. Explain how each event should have been treated in accordance with generally accepted accounting principles.

ii. Prepare a corrected classified balance sheet and income statement based on your understanding of generally accepted accounting principles.

QUESTION 2 : (15 Points)

AJ Ventures Ltd is a company dedicated to the manufacture of water bottles that are mainly purchased for sporting activities. Current sales are direct to retailers, but in recent years there has been a steady decline in production due to increasing foreign competition. In the last business year (2019) the company produced its lowest profit in ten (10) years. The 2020 forecast indicates that the current deterioration in earnings is likely to continue.

The firm believes that a profit of $80,000 must be achieved to provide an adequate return on capital. The CEO has called for a review of current pricing and marketing policies. The Marketing Director has completed this review and is forwarding the proposals to you for your evaluation and recommendation, along with the income statement for the year ending December 31, 2019 (see below).

AJ Ventures limited.

STATEMENT OF INCOME

For the year ending December 31, 2019

Sales revenue (100,000 bottles at $10)			$1,000,000
cost of goods sold
Direct materials	$100,000
Direct labour	350.000
Variable manufacturing overhead	60.000
Fixed manufacturing overhead	220,000
		$730,000
General administration expenses		140.000
General selling and distribution expenses
Sales commission (2% of sales)	20,000
Shipping cost (variable per unit sold)	50,000
Fixed costs	40.000
		110,000
			$980,000
Income			$20,000

The information to be presented to the CEO includes the following three proposals:

(i) Proceed on the basis of analysis of market research studies that indicate that the demand for the bottles is such that a 10% reduction in the sale price would increase the demand by 40%.

(ii) Proceed to a query that the marketing director has made to a mail order company about the possibility of buying 50,000 bottles per year if the sale price is appropriate. The mail-order company would transport the AJ Ventures bottles to its own warehouse, and AJ Ventures would not pay any commission on these sales. However, if an acceptable price can be negotiated, AJ Ventures is expected to contribute $60,000 per year to the cost of producing the mail-order catalog. AJ Ventures would also be required to provide special additional packaging at a cost of $0.50 per bottle. The marketing manager believes that in 2019 sales from the existing business would remain unchanged at 100,000 bottles, based on a sales price of $10 if the mail-order contract is made.

(iii) Proceed based on the marketing director's opinion that a 10% price reduction, coupled with a $30,000 national advertising campaign, can increase sales to the maximum capacity of 160,000 bottles.

Required

to. The calculation of the break-even value of sales based on the results of 2019. (1 points)

b. A financial evaluation of the proposal (i) (3 points)

C. An estimate (based on proposition (i)) of the number of bottles that AJ Ventures would need to sell for $9 each to achieve the target profit of $80,000. (2 points)

d. An estimate of the minimum prices that would have to be quoted to the mail-order company to

1. I. I make sure that AJ Ventures would at least break even on the mail order contract (2 points)

1. II. ensure that the same overall profit is obtained as in proposal (i) of the mail order contract. (2 points)

1. III. Make sure you get the overall target profit from the mail order contract. (2 points)

my. A financial evaluation of the proposal (iii) (3 points)

Answer rating: 100% (QA)

QUESTION 1 a Justification of Adannas Treatment Rent and Security Deposit Adanna correctly recorded the payment of the first months rent 300 and the security deposit 1000 on the balance sheet as a red... View the full answer