Professional Documents
Culture Documents
Case 1-1
Issues.............................................................................................................
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Facts...............................................................................................................
............................3
Analysis..........................................................................................................
............................5
Conclusions/solutions/recommendations.......................................................
............................8
Issues:
1.
a. How would you report on the three-month operations of Ribbons an'
Bows, Inc., through June 30?
b. Was the company profitable? (Ignore income taxes.)
c. Why did its cash in the bank decline during the three-month operating
period?
2. How should you report the financial condition of the business on June
30, 2010?
3. Do you believe Carmen's first three months of operation could be
characterized as "successful"? Explain your answer.
Facts
1. Carmen Diaz decided to open a small ribbon shop. Two of her cousins
agreed to loan the business $10,000 for one year at a 6 percent interest
rate.
9. Carmen had not paid herself as salary or dividends during the four
months of operations. And she prepared to get some compensation in July
if cash was available. Before staring her business, she had worked for
$1,300 a month as a cashier in a local grocery store.
Analysis
1a.
Customer has paid ($7,400) cash for ribbons and accessories and credit
sales ($320). Cost of sales is derived from the following equation:
beginning merchandise inventory ($3,300) plus purchases ($2,900) less
ending merchandise inventory $4,100 equals cost of sales $2,100. Rent
expense is $1,800 of $600 per month times three months. Part-time
employee expenses ($1,600) is the sum of cash paid ($1510) plus amount
owed ($90). The prepaid advertising ($150) was run by the local paper on
April2. The benefit of the asset expired so the asset became an expense.
The commercial sewing machine purchased led to a $1,800 asset being
recorded. The asset's benefit was partly consumed during May and June
resulting in a $60 depreciation charge. Some of the future benefits of the
computer and related software asset were consumed during the three
month period. A $250 depreciation charge must be recognized. Carman
has rented the cousins money for four month. The cousins loan is
$10,000. ($10,000*0.6*4/12)=200. Thus, the interest for four month is $200.
Figure 1
Ribbons an Bows Income Statement
For the period April 1 to June 30, 2010
Sales | $7,720 |
Cost of Sales | (2,100) |
Gross Margin | $5,620 |
Employee Wages | (1,600) |
Rent | (1,800) |
Ribbons an Bows Inc., within its three months of the operation its shows
that the company has a good start off. The income statement shows that
the company is profitable with the sales totaling $7,720. The cash flow
statement shows that the cash ending balance is less than the beginning
balance and that is because Carmen decided to expand her business,
which has reduced the cash. The balance sheet on the other hand shows
that companys debt is not excessive.
There is still some potential for Ribbon an' Bows Inc., increasing their profit.
They should have more effective market plan and use advertisement to
promote their service