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Business decisions are always made within the context of a specific organization. To help you understand how to use managerial accounting information in making business decisions, we will focus throughout this book on a hypothetical company called C&C Sports, a manufacturer of athletic uniforms. By focusing on a single company, we hope to help you understand how managerial decisions unfold within the organization. Although C&C Sports is fictitious, its story is based on that of a similar real-world company.

C&C’s History

C&C Sports is located in Brownsville, Texas, where it has been run by the Douglas family since 1928. The company began as a small sewing operation that supplied clothing to workers on the Gateway International Bridge. As Brownsville grew and workers came and went, the Douglases began to look for a market niche to guide the company’s future growth. Recognizing the increasing number of youth participating in organized sports, the family decided to manufacture baseball uniforms. Today, President George Douglas heads the third generation of leadership at the company, and several other relatives hold key management positions.  Exhibit T1.1  shows C&C Sports’ current organization chart.

The organization chart of C and C Sports' begins with President, George Douglas, followed by three vice presidents, the vice president of operations, Chad Davis, the vice president of finance and administration, Claire Elliot, and the vice president of marketing, Jonathan Smith. Inventory manager, Bradley Austin, and production manager, Mary Townsley, report to the vice president of operations. Inventory manager, Bradley Austin manages the purchasing agent and three warehouse personnel, while production manager, Mary Townsley manages six sewing machine operators, two packaging employees, one plotter and pattern designer, and one chenille machine operator. Controller, Erin Newton, and three administrative staff members report to the vice president of finance and administration, while seven members of the sales staff and one advertising staff report to the vice president of marketing.

EXHIBIT T1.1  C&C Sports’ organization chart.

The family has made a conscious decision not to follow the textile industry’s trend of transferring manufacturing operations to China and other foreign countries that offer cheap labor. They have chosen to remain a domestic producer and to focus instead on quick delivery and fast customer response within a local market—the state of Texas. The company manufactures three products: baseball jerseys, baseball pants, and letter award jackets.

Exhibit T1.2  illustrates C&C Sports’ supply chain. Notice that it begins with Paladin Polymers, Inc., which makes polyester pellets. Neff Fiber Manufacturing melts the polyester pellets and pushes them through an extruder to create the raw fiber, called partially oriented yarn. Centex Yarns converts the raw fiber into finished yarn by covering, twisting, texturizing, and coloring it. Bradley Textile Mills then uses the finished yarn to weave the fabric that C&C Sports buys. C&C Sports manufactures the uniforms and sells them to retailers such as Universal Sports Exchange, which resell them to the end customer.

The supply chain of C and C Sports is illustrated in a sequential diagram. The diagram begins with the Polymer Producer, Paladin Polymers, Incorporated. It is followed by the Raw Fiber producer, Neff Fiber Manufacturing; the Yarn producer, Centex Yarns; the Fabric producer, Bradley Textile Mills; the Apparel manufacturer, C and C Sports; the Retailer, Universal Sports Exchange; and the end customer.

EXHIBIT T1.2  C&C Sports’ supply chain.

While  Exhibit T1.2  shows the major links in the supply chain, a number of other firms play a role as well. For instance, transportation companies provide shipping services between C&C Sports and Universal Sports Exchange. And providers of other items, such as buttons and thread, supply C&C’s need for production materials.

A Brief Look at C&C’s Resources

If C&C is to remain successful, it must generate sufficient resources to continue operating. To date, the company has enjoyed moderate financial success. Its latest financial statements are presented in  Exhibits T1.3,   T1.4 , and  T1.5 .

A screenshot of an Excel worksheet presents comparative income statements. It begins with a three-line heading consisting of the name of the company, C and C Sports, the type of statement, income statements, and the period for which statements are prepared, For the Years ended December 31, 2018 through 2020. The statement is divided into four columns. The account names and their respective amounts for each year are: Sales, in 2020, $7,855,000; in 2019, $7,015, 000; and in 2018, $7,065,000. Cost of goods sold, in 2020, 5,817,590; in 2019, 5,215,000; and in 2018, 5,304,600. Gross profit, in 2020, 2,037,410; in 2019, 1,800,000; and in 2018, 1,760,400. Selling and administrative expenses, in 2020, 1,735,539; in 2019, 1,570,689; and in 2018, 1,555,778. Operating income, in 2020, 301,871; in 2019, 229,311; and in 2018, 204,622. Interest expense, in 2020, 41,711; in 2019, 43,210; and in 2018, 45,698. Income before taxes, in 2020, 260,160; in 2019, 186,101; and in 2018, 158,924. Tax expense at 30%, in 2020, 78,048; in 2019, 55,830; and in 2018, 47,677. Net income, in 2020, $182,112; in 2019, $130,271; and in 2018, $111,247.

EXHIBIT T1.3  C&C Sports’ income statement.

An screenshot of and Excel worksheet presents comparative balance sheets. It begins with a three-line heading consisting of the name of the company, C and C Sports, the type of statement, Balance sheets, and the statement date, As of December 31, 2020 and 2019. At December 31, 2020, the account names and line item labels, and their respective amounts in the assets section include: Cash, $7,752; Accounts receivable net, 578,639; Raw materials, $682,000; Work in process, 14,660; Finished goods, 227,270; Total inventories, 923,930; Prepaid expenses, 24,388; Total current assets, 1,534,709; Machinery and equipment net, 365,335; Other assets, 29,937; and Total assets, $1,929,981. At December 31, 2020, the account names and line item labels, and their respective amounts in the liabilities and stockholders’ equity section include: Accounts payable, $441,602; Accrued liabilities, 84,642; Short-term debt, 125,000; Current maturities of long-term debt, 40,000; Total current liabilities, 691,244; Long-term debt, 410,000; Total liabilities, 1,101,244; Common stock, 250,000; Retained earnings, 578,737; Total stockholders' equity, 828,737; and Total liabilities and stockholders' equity, $1,929,981. At December 31, 2019, the account names and line item labels, and their respective amounts in the assets section include: Cash, $36,773; Accounts receivable net, 540,462; Raw materials, $566,000; Work in process, 14,630; Finished goods, 211,512; Total inventories, 792,142; Prepaid expenses, 8,165; Total current assets, 1,377,542; Machinery and equipment net, 491,607; Other assets, 33,707; and Total assets, $1,902,856. At December 31, 2020, the account names and line item labels, and their respective amounts in the liabilities and stockholders’ equity section include: Accounts payable, $487,912; Accrued liabilities, 168,319; Short-term debt, 110,000; Current maturities of long-term debt, 40,000; Total current liabilities, 806,231; Long-term debt, 450,000; Total liabilities, 1,256,231; Common stock, 250,000; Retained earnings, 396,625; Total stockholders' equity, 646,625; and Total liabilities and stockholders' equity, $1,902,856.

EXHIBIT T1.4  C&C Sports’ balance sheets.

An screenshot of and Excel worksheet presenting comparative statements of cash flows is displayed. It begins with a three-line heading consisting of the name of the company, C and C Sports, the type of statements, Statements of Cash Flows, and the period for which statements are prepared, for the Years Ended December 31, 2020, 2019, and 2018. In the cash flows from operating activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2020 are: Net income, $182,112; Adjustments to reconcile net income to cash provided by operating activities section: Depreciation, 126,272; Changes in operating assets and liabilities section: Accounts receivable, negative 38,177; Inventories, negative 131,788; Prepaid expenses or other assets, negative 12,453; Accounts payable, negative 46,310; Accrued liabilities, negative 83,677; and Net cash used by operating activities, negative $4,021. Net cash provided by investing activities is zero in 2020. In the cash flows from financing activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2020 are: Short-term borrowing, 15,000; Repayment of long-term debt, negative 40,000; and Net cash used by financing activities, negative 25,000. The total section shows: Increase or Decrease in cash, negative 29,021; Cash at beginning of period, 36,773; and Cash at end of period, $7,752. In the cash flows from operating activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2019 are: Net income, $130,271; Adjustments to reconcile net income to cash provided by operating activities section: Depreciation, 120,163; Changes in operating assets and liabilities section: Accounts receivable, negative 31,466; Inventories, negative 98,510; Prepaid expenses or other assets, negative 14,507; Accounts payable, negative 28,438; Accrued liabilities, negative 55,267; and Net cash provided by operating activities, 22,246. Net cash provided by investing activities is zero in 2019. In the cash flows from financing activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2019 are: Repayment of long-term debt, negative 40,000; and Net cash used by financing activities, negative 40,000. The total section shows: Increase or Decrease in cash, negative 17,754; Cash at beginning of period, 54,527; and Cash at end of period, $36,773. In the cash flows from operating activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2018 are: Net income, $111,247; Adjustments to reconcile net income to cash provided by operating activities section: Depreciation, 124,731; Changes in operating assets and liabilities section: Accounts receivable, negative 38,663; Inventories, negative 105,411; Prepaid expenses or other assets, negative 22,116; Accounts payable, 8,197; Accrued liabilities, negative 38,575; and Net cash used by operating activities, $39,410. Net cash provided by investing activities is zero in 2018. In the cash flows from financing activities section, the section labels, account names and line item labels, and the respective amounts for the year ending December 31, 2018 are: Repayment of long-term debt, negative 40,000; and Net cash used by financing activities, negative 40,000. In the totals section, Increase or Decrease in cash, negative 590; Cash at beginning of period, 55,117; and Cash at end of period, $54,527.

EXHIBIT T1.5  C&C Sports’ statement of cash flows.

Although details of conducting an analysis of C&C’s financial statements are presented in  Chapter 12 , a brief look at some important trends and indicators will help you understand the company’s resource position. The availability of resources such as cash and inventory will determine how C&C is able to respond to changes in the business environment to take advantage of opportunities that arise.

Let’s first take a look at the Statement of Cash Flows (see  page TF1-5 ) because the ability to generate cash can make or break a small business. The first section of the statement shows that over the last three years, C&C has seen a decline in cash from operations. In fact, in 2020, cash from operations was negative. Income has been increasing, but accounts receivable and inventories have been increasing, too. In fact, the changes in all of the working capital accounts (current assets and current liabilities) have created a drain on cash.

C&C doesn’t have any investing activities, which is not unusual for a small business. The other source of cash flow is financing activities, and you can see that each year, C&C has paid off more debt than it has borrowed. It appears that C&C may be trading long-term debt for short-term debt, as evidenced by the repaying of long-term debt and the increase in short-term debt. This is a good strategy only if the terms of the short-term debt are better than what the company can currently get on long-term debt. Since cash from operations and cash from financing activities are decreasing, the cash balance is decreasing. This trend can’t continue into the future, so management needs to find a way to increase cash, preferably from operating activities.

Now let’s consider some key relationships on the income statement ( Exhibit T1.3 ,  p. TF1-3 ). You can see that sales decreased from 2018 to 2019 and increased from 2019 to 2020, yet net income increased every year. C&C was able to generate increasing income, even when sales declined, because expenses as a percentage of sales were reduced. The following table shows various income statement accounts as a percentage of sales. Cost of goods sold as a percentage of sales decreased each year, resulting in a higher gross profit percentage. Selling and administrative expense increased as a percentage of sales from 2018 to 2019 and decreased from 2019 to 2020.

The operating income percentage is low when compared to other apparel manufacturers. IBISWorld, a company that provides market analyses by industry, estimates that companies in this industry have an average 4.7% profit margin, as shown in  Exhibit T1.6 . 1  In the industry, smaller firms tend to lack economies of scale in production, have a higher cost of capital, and have higher administrative costs than larger firms. This is true of C&C Sports and is the primary reason that C&C’s costs runs higher as a percentage of sales than that of other apparel manufacturers.

A pie diagram illustrates the average cost structure for costume and team uniform manufacturing in the United States in 2018. The data in the diagram are: Rent and utilities, 2.4%; Profit, 4.7%; Wages, 23.4%; Other, 26.5%; and Purchases, 43.0%.

EXHIBIT T1.6  Average cost structure for costume and team uniform manufacturing in the United States, 2018.