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Case study on Accounting

Acme Jewelry Design & Mfg.


First Month of Operations: 10,000 units sold at $10 per unit.

Second Month of Operations: 20,000 units sold. The first 10,000 at $10 per unit, and the second 10,000 at $8 per unit.

Third Month of Operations: 40,000 units sold at $6 per unit.

Cash Flow characteristics: Goods are shipped at the end of the month are paid to the Company at the end of the following month by the customer.

Cost of Goods Soldis made up of three components:

Direct Materials – -$2 per unit

Direct Labor—$3 per unit, renegotiated to $2 in the third month with new pricing

Fixed Machinery and Mfg.machinery and space rental costs—$10,000 per month, $15,000 with new labor price in month 3

Cash flow characteristics: Mfg. is outsourced to a different organization and all costs are paid the next month following the month they are produced – i.e. paid the next month after the month they are received.

Operating Expenses: the remainder of the company’s expenses includes the following:

Salaries for office staff and the Owner are fixed at $120,000 per year or $10,000 per month. $50,000 of the total goes to the owner

Advertising is a fixed rate contract with an internet services firm which provides the company with secure servers, web analytics and Search Engine Optimization services for $3000 per month.

Office Rental is a fixed yearly rental contract for the administrative offices which costs the company $4500 per month.

Insurance is a fixed rate contract for insurance on the plant property and equipment is $1000 per month.

Cash flow characteristics: All operating expenses are paid during the month that they are incurred.

Ownership and Taxation: The Company is owned by a single individual who is paid a salary of $50,000 per year. The following tax rates are in affect for the purposes of calculating tax on taxable income:

Corporate Tax Rate: 30%

Individual Tax Rate: 40%

Dividend Tax Rate: 15%

Appendix Continued:


First MonthSecond Month

Balance Sheet

Income StatementCash FlowBalance SheetIncome StatementCash FlowBalance Sheet
Accounts ReceivableDirect materials100,000
Direct Labor
Total Assets75,000


Machinery rent156,500
Accounts Payable


Cost of Goods Sold(60,000)060,000(60,000)


Owners’ Equity


Owners Capital75,000Office Rental75,000
Retained EarningsInsurance21,500
Total Owners Equity75,000


Operating expenses(18,500)(18,500)96,500
Net Pre-tax Profit21,500156,500
Third Month
Income StatementCash FlowBalance Sheet
Accounts ReceivableDirect materials
Direct Labor
Total Assets


Machinery rent
Accounts Payable


Cost of Goods Sold


Owners’ Equity


Owners CapitalOffice Rental
Retained EarningsInsurance
Total Owners Equity


Operating expenses
Net Pre-tax Profit

Calculate for the Third Month:

Current Assets

Current Liabilities

Current Ratio

Owners’ Equity

Cost of Goods Sold

Gross Profit Margin

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