Q1: How might Hynes and the investors use the profit plan in managing the business? Ans: The profit plan prepared by Hynes can be helpful in forecasting the financial position (assets and liabilities) of the business. This would assist Hynes and investors to plan the business in advance and improve on profits. The information can be used to determine the solvency of the business by showing how much assets are available for payment of liabilities and dividends. Profit plan can also help in predicting the progress of the business and ascertain the amount of capital employed in business. It can prove as a good tool for budgeting and can uncover many potential bottlenecks before they occur. Hynes and investors may use the profit plan to decide on goals and objectives that can serve as benchmark for evaluating subsequent performance.
Q2: How might the projected transactions impact the company’s balance sheet? (Think about each transaction in terms of its impact on both the basic accounting equation and specific accounts.) Ans: Each of the projected transactions from the case study have been filled out in the worksheet (see following page) designed based on the basic accounting equation,
Assets = Liability + Owner’s Equity.
Q3: Prepare a profit plan in the form of an income statement for the first year of operations. Ans:
INCOME STATEMENT FOR PROJECTED ONE YEAR OF OPERATIONS
Cost of Goods Sold
Equipment Depreciation Costs
Selling, General & Administrative Costs
Equipment Upgrade Cost
Profit before taxes
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