Bennett Alexander is correct when he believes that things are going well. The point to this case study is to explain to the stockholders in Chemalite, Inc. that the new business is in fact a good investment.
Mr. Larson (stockholder with little business experience) states, “…six months ago, we had $375,000 and now we have $230,000. By my reckoning, we’ve managed to lose $145,000 in six months and haven’t much to show for it.” Before Mr. Larson ever invested, a professional should have explained to him his opportunity cost, in his initial investment made, to a start up company. The purpose of an investment is to help finance a companies operating activities. Cash flow from operating activities is considered a healthy sign for a company. Chemalite, Inc. has not lost $145,000; rather it has invested it in the following:
$7,500 for legal fees, charter costs and printing expenses
$62,500 building machinery to produce commercial models
$75,000 worth of plastics and chemicals
Stockholders were told at the end of June 2003, that Alexander was hoping to be producing chemalites by the end of August. Sure enough, by the last half of 2003, Chemalite, Inc. did indeed go into full operation with sales of $754,500. This ability to generate sales early is important because Alexander estimates competition within about five years. Additionally, Chemalite, Inc. has a firm order with the organizing committee of the 2004 Olympic Games for 60,000 chemalites at $1.50 each. This will increase sales by $90,000.
Chemalite, Inc.’s machinery used to produce chemalites are general purpose machinery that might reasonably be expected to last for 10 years. The $212,500 spent on the machines are long term assets. Mr. Larson needs to know that although the machines were purchased with cash, through depreciation, Chemalite, Inc. only has to account for $10,625 in this statement of financial position.
Chemalite, Inc has no liabilities. In fact,...