Reference no: EM133023048

Question - John O'Sullivan graduated in May 2019 from UIC and looked everywhere for a job. He searched and searched for a decent job, and after a while he decided that the only way to get ahead was to start his own business. In order to support himself, John decided to pursue a life-long dream of owning a hot dog cart business in downtown Chicago. Without any substantial savings of his own, John borrowed $3,000 to purchase a hot dog cart (cart price: $3,000) from the local bank at an interest rate of 2.0% per year, with a loan duration of three years. Computed using simple interest formula, his annual interest payment is $60. To fund start-up costs, John sold his car to buy basic supplies like hot dogs, buns, wrappers, and all the condiments (e.g., mustard, relish, onions, etc.) to make a great hot dog. For accounting purposes, John considers the "supply" cost per one piece of hot dog sold as $0.50. John always buys supplies in quantities of 1,000 to ensure an adequate inventory supply. John hired his best friend from school, Jim, to help work with the hot dog cart. Jimworks 40 hours per week (2080 hours per year) at the rate of $10.00 per hour. To be a good employer, John provides benefits to Jim. The cost of these benefits is 29% of Jim's total salary. Note: John's own compensation is based on the bottom line (i.e., profit or loss) of the business. The price of each hot dog is $4.00. Condiments are free. In addition to selling to the public, John has a contract with the Chicago police department --- this contract provides the local police with a $2.75 discount for each purchased hot dog. Further, John is charitable and provides free hot dogs to needy families that can't afford to pay. Sometimes, when a good customer forgets their wallet, John will give them a hot dog based on their promise to pay the next day (John truly is a good guy). As part of owning a business, John also has the need to purchase insurance to protect his business against the threat of fire, flood, or theft. Insurance cost is $300 per year. According to generally accepted accounting principles (GAAP), John should depreciate the hot dog cart in equal amounts over five years (straight line). Assume that due to his charitable nature, John's businessis tax exempt. (See additional information below, i.e. 4a and 4b, etc.).

Required -

1. If John sold a total of 18,500 hot dogs (included in this number is the 6,750 hot dogs sold to policemen), what is the total or gross revenue for the year?

2. Assuming that John provided an average of 45 free hot dogs per month to needy families, and adding the discount given to members of the policemen, what is the total contractual and charity allowances for the year?

3. What is the Net Revenue? [Net Revenue = Total Charges minus Discounts & Charity]

4. What is the annual principal payment? What is the annual interest payment?

4a. Construct an Income Statement (Statement of Revenue and Expenses) for John's hot dog business. Use the information from the case scenario and from the questions. (Income Statement Template provided) (submit Excel spreadsheet)

4b. During the course of the year, customers "forgot" their wallets 375 times. Of these occasions, John expects to never receive payment for 350 hot dogs (bad debt). On the other 25 pieces of hotdogs, he is still holding out hope and believes payment will be received (accounts receivable). Include these items on your financial statements.

5. What is the Operating Margin? (in percent) - operating margin is a measure of the level of profitability experienced in a firm's operations.

6. What is the amount of total fixed assets (equipment) at the end of the first year? (consider 1 year depreciation)

7. Assuming there are no more equipment purchases, what will be the value of total fixed assets at the end of the second year? (consider 2 years depreciation)

8. What is the value of inventory at the end of the year? Inventory is the total goods available on hand and available to sell, presumably within a year.

9. What is the value of Accounts Receivable at the end of the year? See item 4b above.