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FINAN204-23A - Tutorial 3

This document provides sample questions and guidance for an entrepreneurial finance tutorial. Question One involves calculating sales revenue, cost of production, cost of goods sold, and inventories for a new electronics business over its first three months. Question Two asks to estimate the survival/EBDAT breakeven point for a company based on its income statement. Question Three provides income statements and balance sheets for a technology company and asks to prepare a statement of cash flows. Suggested formats are provided for answering parts of Question One, and notes on survival revenue and cash flow statements are included.

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48 views

FINAN204-23A - Tutorial 3

This document provides sample questions and guidance for an entrepreneurial finance tutorial. Question One involves calculating sales revenue, cost of production, cost of goods sold, and inventories for a new electronics business over its first three months. Question Two asks to estimate the survival/EBDAT breakeven point for a company based on its income statement. Question Three provides income statements and balance sheets for a technology company and asks to prepare a statement of cash flows. Suggested formats are provided for answering parts of Question One, and notes on survival revenue and cash flow statements are included.

Uploaded by

Xiaohan Lu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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Entrepreneurial Finance

Tutorial 3

Shashie Dissanayaka ( ACMA – CGMA )


School of Accounting, Finance and Economics
The University of Waikato 1
Question One
Assume you have developed and tested a prototype electronic product and are about to start your new
business. You purchase pre-programmed computer chips at $70 per unit. Other component costs
include plastic casings at $15 per unit and assembly hardware at $5 per unit. Direct labor costs are $15
per hour and three units can be produced per hour. You intend to sell each unit at a 50 percent mark-up
over the total costs of producing each unit. The plan is to produce 500 product units per month in
January, February, and March. Sales are expected to be: 200 units in January, 400 units in February,
and 800 units in March.
A. Calculate the dollar amount of sales revenue expected in each month (i.e., January, February, and
March) and for the first quarter of the year.
 
B. Prepare a cost of production schedule for January, February, and March.

C. Prepare a cost of goods sold schedule for each of the three months and for the first quarter of the
year. Using your cost of goods sold estimates and the sales revenues expected in Part A, calculate the
gross earnings for January, February, and March, as well as for the first quarter of the year.

D. Prepare an inventories schedule for January, February, and March.


Suggested Format for Answer A.
Expected Sales Revenue
Answer A. - Expected Sales Revenue
Suggested Format for Answer B. - cost
of production schedule
Suggested Format for Answer C.-
Suggested Format for Answer D. -
inventories schedule
Question Two
During its first year of operations, the SubRay Corporation produced the following income
statement results:

Costs of goods sold are expected to vary with sales and be a constant percentage of sales.
The general and administrative employees have been hired and are expected to remain a
fixed cost. Marketing expenses are also expected to remain fixed since the current sales
staff members are expected to remain on fixed salaries and no new hires are planned. The
effective tax rate is expected to be 30 percent for a profitable firm.
Question Two

A. Estimate the survival or EBDAT breakeven amount in terms of survival


revenues necessary for the SubRay Corporation to breakeven next year.

Survival revenues (SR), when EBDAT = 0, are calculated as:


Variable Cost Revenue Ratio (VCRR) = (VC/R) = $180,000/$300,000 = .60

Cash Fixed Costs (CFC) = general and administrative + marketing + interest


expense = $60,000 + $60,000 + $10,000 = $130,000

• Survival Revenues (SR) = [$130,000/(1 - .60)] = $130,000/.40 = $325,000


Question Two – Check if the
survival revenue arrived is correct
Notes

EBITDA
Earnings Before Interest, Tax, Depreciation and Amortization

What is EBITDA?
EBITDA stands for Earnings Before Interest, Taxes, Depreciation,
and Amortization and is a metric used to evaluate a company’s
operating performance.

It can be seen as a loose proxy for cash flow from the entire


company’s operations.
Notes – Survival Revenue

Survival Revenue refers to the amount of


sales that a firm must have in order to cover
its variable costs and cash expenses.

It is another way of expressing the revenue


needed for a company to "break even" but
specifically clarifying that non-cash expenses
are excluded from the calculation.
Question Two
B. Assume that the product selling price is $50 per
unit. Calculate the EBDAT breakeven point in terms
of the number of units that will have to be sold next
year.
Question Three
Salza Technology Corporation increased its sales from
$375,000 in 2018 to $450,000 in year 2019 as is shown in
the firm’s income statements presented below. LeAnn
Sands, chief executive officer (CEO) and founder of the
firm expressed concern that the cash account and the firm’s
marketable securities declined substantially between 2018
and 2019. Salza’s complete balance sheets are also shown
below. Ms. Sands is seeking your assistance in the
preparation of a statement of cash flows for Salza
Technology.
Question Three –Continued ..
Notes – cashflow
statement
Cash flow statements give a summary of cash
received and cash spent over a period of time.
eg each month or each quarter, year ending.
Question Three –
Prepare a statement of cash flows for 2019 for the
Salza Technology Corporation.
Question Three
B. Provide a brief description of what happened in terms of
cash flows (both inflows and outflows) for Salza between years
2018 and 2019.

Alternative way ( Advanced)


This cash flow statement shows Company started the year with approximately $39k in
cash and equivalents.

Cash flow is broken out into cash flow from operating activities, investing activities,
and financing activities.

The business brought in $45k through its regular operating activities. Meanwhile, it
spent approximately $90 k in investment activities, and also bought in a further $22k in
financing activities, for a total cash outflow of $23k.

The result is the business ended the year with a positive cash flow of $16k.
Thank you

WWW.WAIKATO.AC.NZ 0800 WAIKATO

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