Blink Adventures Company was founded by Lisa Manoban to produce a game marketed under the name Bears
Question:
Blink Adventures Company was founded by Lisa Manoban to produce a game marketed under the name "Bears and Unicorns." Each "Bears and Unicorns" cost the company ₱35 to produce. In addition to these production costs that varied in direct proportion to volume (so-called variable costs), the company also incurred ₱10,000 monthly "being in business" costs (so-called fixed costs) irrespective of the month's volume. The company sold its product for ₱55 each. As of December 31, Manoban had been producing "Bears and Unicorns" for three months using rented facilities. The balance sheet on that date was as follows:
Manoban was very pleased to be operating at a profit in such a short time. December sales had been 750 units, up from 500 in November, enough to report a profit for the month and to eliminate the deficit accumulated in October and November. Sales were expected to be 1,000 units in January, and Manoban’s projections showed sales increases of 500 units per month after that. Thus, by May monthly sales were expected to be 3,000 units. By September that figure would be 5,000 units.
Manoban was very conscious of developing good sales channel relationships in order to increase sales, so “Bears and Unicorns” deliveries were always prompt. This required production schedules 30 days in advance of predicted sales. For example, 1,000 “Bears and Unicorns” in December for January sales and would produce 1,500 in January for February’s demand. The company billed its customers with stated terms of 30 days net but did not strictly enforce these credit terms with the result that customers seemed to be taking an additional month to pay. All of the company’s costs were paid in cash in the month in which they were incurred.
Manitoban's predictions came true. By March, sales had reached 2,000 “Bears and Unicorns”, and 2,500 units were produced in March for April sales. Total profit for the year by March 31 had reached ₱60,000. In order to get a respite from the increasingly hectic activities of running the business, in mid-April Manoban went on a family vacation. Within the week the company’s bookkeeper called. Blink Adventures’ bank balance was almost zero, so necessary materials could not be purchased. Unless Manoban returned immediately to raise more cash, the entire operation would have to shut down within a few days.
Question
1. Prepare a monthly income statement, balance sheets, and cash budgets based on sales increases of 500 units per month and 30-day advance production for January through September. When will the company need extra funds? How much will be needed? When can a short-term loan cover the need to repair?
2. How is it possible that a company starts with ₱250,000 in capital and has profitable sales for a period of six months and still ends up with a zero bank balance? Why did Blink Adventures need money in April? How could this need have been avoided?
3. From your calculations and financial statements for Question 1, derive cash flow statements for the months of March, May, and July from each month’s beginning and ending balance sheets and income statement. Compare these derived cash flow statements with the cash budgets prepared directly in Question 1.
Accounting Texts and Cases
ISBN: 978-1259097126
13th edition
Authors: Robert Anthony, David Hawkins, Kenneth Merchant