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Gourmet Delights, Inc.
Author(s):
Young, David W.
Functional Area(s):
   Finance/Financial Management
   Financial Accounting
Setting(s):
   For Profit
Difficulty Level: Beginner
Pages: 2
Teaching Note: Available. 
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First Page and the Assignment Questions:

“We're a success!” exclaimed Ethan McCall, chief executive officer of Gourmet Delights, Inc. upon seeing that his March profit had reached $2,000. He continued: “If our projections for the next six months are accurate, we'll have earned enough to rent facilities in Newburytown and double our service area. My only concern is whether we'll have the cash on hand to do so.”

With that, Mr. McCall set about predicting how his cash would change in accordance with his projected growth in volume of activity. Although March had been a good month, cash had been falling since December, and he was concerned about making sure he had enough on hand to purchase supplies and meet payroll for the remainder of the year.

BACKGROUND

Gourmet Delights was a company that specialized in preparing and delivering gourmet meals to people’s homes. Its clientele included many elderly people plus numerous two-career families, where neither partner had the energy to prepare a meal after a long day at work. Convinced that there was a large market for a specialized meal service, and with $25,000 in start-up capital, the company had begun operations in early October.

To assure that it wouldn't run short of meals during any given month, the company prepared its meals one month in advance and froze them. By basing production on the following month's anticipated sales, the company had found that it could assure its customers of uninterrupted service. All the costs associated with these meals were paid in the month in which production took place.

Another advantage of freezing the meals was that they could be delivered in bulk to customers. The meals were easily stored in the freezing compartments of customers’ refrigerators. From the company's perspective, freezing the meals and delivering them in bulk had allowed it to keep its transportation costs at a minimum. Customers seemed to have no complaints about the food being frozen, and many, in fact, had written Mr. McCall to tell him how much they enjoyed the meals.

Assignment

  1. Prepare actual balance sheets, income statements, and statements of cash flows (SCF) for November through March, and pro forma statements for April through September. Be sure you reconcile Equity, Accounts Receivable, and Inventory for each month, beginning in November, and, for each account, using the basic formula:
    BB + Additions - Reductions = EB*
  2. What problems, if any, does the organization have? Please be as specific as you can, clearly identifying the cause of any problems you identify.
  3. What advice would you give Mr. McCall?
* Set up a spreadsheet containing the balance sheet, the operating statement, and the statement of cash flows in such a way that they are all interconnected. That is, try to make the spreadsheet as “formula driven” as possible, using only the number of meals, the variable cost per meal, the per-meal price, and fixed costs as the “drivers.”