ust 4 Kids Bill Travis owns two Just 4

Just 4 Kids

Bill Travis owns two Just 4 Kids stores in
Florence, South Carolina. He believes
that the stores have been successful and he wants to open a new store in Sumter
about 30 miles west of Florence. Bill
has been in the retail line for over 20 years, and he worked at his uncle’s
hobby shop while in high school and college before starting his own store at
the age of 25.

Two big secrets to a successful toy store
operation are good location and product selection. Bill’s first store is located in downtown
Florence. Since Bill had been born and
raised in Florence, he attracted a good customer base that remained loyal to
his store after some of the giant chain related toy stores began to move into
the area. About 10 years ago, Bill saw
the change in customer shopping habits and purchased a second store near an
interchange to Interstate 95 in a rapidly growing retail area. Lots of new families had moved into the area,
and Bill could not totally rely on the “good old boy” market alone to sustain
his market share. This second store
catered to the younger more mobile generation that shopped at or near malls.

Bill now was looking into other
markets. Sumter was not located on the
interstate, but the area was growing because of its proximity to the state
capital of Columbia, which was just 30 miles to its west. Bill believed that the people of Sumter who
commuted to work in Columbia would prefer to limit their driving for shopping
activities to the immediate Sumter area.
Also, since Bill was a respected citizen of Florence, his reputation as
an honest businessman had spread to Sumter.
He believed he could quickly build up a new customer base in that
location. The big chain type stores also
did not seem as interested in the Sumter area, preferring instead to locate in
the larger metropolitan areas of Columbia and Florence.

The appropriate toy items to feature in his
stores were very important. Bill felt
that his area of influence was strictly regional, and he did not have to carry
much of the standard inventory of the national chain type of toy stores. His toy lines were more a reflection of local
interest; thus NASCAR related items were hot sellers. Bill’s clientele also seemed interested in
computer action games and a new line of Ya’ll talking dolls.

Bill went to the Florence National Bank to
inquire about funding for the new store location. He had found an abandoned furniture store in
downtown Sumter along Main Street that was up for sale for $280,000. The store seemed to be the right size and at
a good location. A grocery store was in
the same block with ample off street parking.
Bill brought his balance sheet for the last two years and an income
statement for the last operating year to the bank to support his request for a
retail loan of $250,000. (Copies of the
financial statements are listed at the end of the case.)

Nick Tightwad, the local bank loan vice
president had been a friend of Bill’s for many years. He was a customer at Bill’s toy store on
close out sales, and his bank had underwritten the funding for the second
store. Nick was excited about Bill’s
expansion goals and the prospect of another business loan with his friend. At the same time, Nick had to live up to his
reputation. He was not about to approve
a loan unless he was almost 100 percent sure that the borrower would not
default. Bill’s past success had
alleviated much of Nick’s concern, but he still wanted to complete a detailed
analysis of the financial performance of Just 4 Kids during the last calendar
year. Upon reviewing the balance sheet,
Nick noticed a drop in cash during the last year even though Bill showed a
strong profitable performance. The
current financial statements did not seem to give enough information to answer
Nick’s questions and he asked Bill to prepare a statement of cash flows for the
year ending December 31, 20×7.

Just 4 Kids
Balance Sheet
December 31, 20×6

ASSETS

Cash

$ 38,500

Accounts
Receivable

43,000

Inventory

126,000

Other
Current Assets

17,500

Total
Current Assets

$225,000

Land

$100,000

Furnishings,
Fixtures & Vehicles

$150,000

Less
Accumulated Depreciation

-30,000

Furnishings,
Fixtures & Vehicles (net)

120,000

Building

400,000

Less
Accumulated Depreciation

175,000

Building
(net)

225,000

Total
Long-Term Assets

445,000

Total
Assets

$670,000

LIABILITIES

Accounts
Payable

$ 57,500

Short-Term
Notes Payable

20,000

Other
Current Liabilities

13,000

Total
Current Liabilities

$ 90,500

Long-Term
Notes Payable

400,000

Total
Liabilities

$490,500

EQUITIES

Capital

$100,000

Retained
Earnings

79,500

Total
Equities

$179,500

Total
Liabilities and Equity

$670,000

Just 4 Kids
Income Statement
For the Year Ended
December 31, 20×7

Sales
Revenue

$600,000

Less Cost of
Goods Sold

310,000

Gross
Margin

290,000

Less
Operating Expenses

Selling
and Administrative

$106,200

Depreciation

20,000

Total
Operating Expenses

126,200

Operating
Income

163,800

Interest
Expense

$50,000

Loss
on Vehicle Sale

2,500

Total
Other Expenses

52,500

Net
Income Before Taxes

111,300

Less
Income Taxes

39,300

Net
Income

$72,000

Just 4 Kids
Balance Sheet
December 31, 20×7

ASSETS

Cash

$2,600

Accounts
Receivable

71,000

Inventory

193,000

Other
Current Assets

18,900

Total
Current Assets

$285,500

Land

$100,000

Furnishings,
Fixtures & Vehicles

$166,000

Less
Accumulated Depreciation

-28,500

Furnishings,
Fixtures & Vehicles (net)

137,500

Building

400,000

Less
Accumulated Depreciation

190,000

Building
(net)

210,000

Total
Long-Term Assets

447,500

Total
Assets

$733,000

LIABILITIES

Accounts
Payable

$ 91,500

Short-Term
Notes Payable

35,000

Other
Current Liabilities

7,000

Total
Current Liabilities

$133,500

Long-Term
Notes Payable

388,000

Total
Liabilities

$521,500

EQUITIES

Capital

$100,000

Retained
Earnings

111,500

Total
Equities

$211,500

Total
Liabilities and Equity

$733,000

Required
(utilizing Excel):

1. Develop a Statement of Cash Flows for Just 4
Kids for the year ending December 31, 20×7.

2. Analyze the performance of Just 4 Kids based on
the financial statements.

3. If you were Bill, how would you explain the
issues, which could be brought up from the analysis completed in parts 1 &
2?

4. If
you were Nick, would you approve the loan for Bill? Why or why not?