Georgette P. Burdell, acting as GPB Inc., weaves cotton place mats to sell through a local craft shop. Because this is a hobby, Georgette does not consider labor time/costs in her financials. The mats sell at a market price for $20 per set of four. The local craft shop charges a 10% commission and remits the net proceeds to GPB Inc., at the end of December. Georgette has woven and sold 25 sets each year for the past two years and expects to sell 26 sets this year. She has enough cotton in inventory to make 26 sets. She paid $7 per set for the cotton. Georgette uses a four-harness loom that she purchased for cash exactly two years ago. The loom is depreciated at the rate of $10 per month. The Accounts Payable balance relates to the cotton inventory and is payable by September 30.
Georgette is considering buying an eight-harness loom so that she can weave more intricate patterns in linen. The new loom costs $1,000 and would be depreciated at $20 per month. Her bank has agreed to lend her $1,000 at 24% interest per year, with $200 payment of principal, plus accrued interest payable each December 31.
Georgette believes she can weave 16 linen place mat sets in time for the Christmas rush if she does not weave any cotton mats. She predicts that each linen set will sell for $50. Linen costs $18 per set. Georgette's supplier will sell her linen on credit, payable December 31.
Georgette plans to keep her old loom whether or not she buys the new loom. The balance sheet for her weaving business at August 31, 2016, is as follows:
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GPB Inc.
Balance Sheet
31-Aug-16
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Assets
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Actual
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Current Assets
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$$$
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Cash
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$118
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Inventory
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182
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Total Current Assets
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300
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Property, Plant, & Equipment
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Loom
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500
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less: Accumulated Depreciation
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-240
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Total PP&E
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260
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Total Assets
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$560
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Liabilities
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Current Liabilities
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Accounts Payable
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$74
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Notes Payable
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0
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Total Current Liabilities
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74
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Stockholders' Equity
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Retained Earnings
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486
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Total Liabilities and Stockholders' Equity
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$560
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Required
1. Build, from a blank file, a spreadsheet in Microsoft Excel or Google Sheets, which will enable you to prepare the budgeted statements listed under requirement #2 below. The cash budgets must be "linked", using cell references, etc., to the required financial statements and to your assumption figures. To maximize points awarded, use an 'assumption table.'
2. Prepare GPB Inc.s' cash budget for 'the four months ending on December 31, 2016' for the two alternatives: #1) weaving the place mats in cotton using the existing loom and #2) weaving the place mats in linen using the new loom. For each alternative, prepare a budgeted income statement for `the four months ending December 31, 2016', and a budgeted balance sheet at December 31, 2016. [NOTE: For each alternative this is one cash budget that covers four months and not four one-month cash budgets. Same applies to the budgeted income statement.]
3. On the basis of financial considerations only, what alternative should GPB Inc. consider doing? What non-financial factors might Georgette consider in her decision?