Ribbons an’ Bows’ Finances a. How would one report on Ribbons an’ Bows Inc. ’s three-month operations through June 30? b. Was Ribbons an’ Bows, Inc. profitable? (Ignoring income taxes) c. Why did Ribbons an’ Bows, Inc. ’s cash in the bank decline during the three-month operating period? 2. How would one report the financial condition of Ribbons an’ Bows, Inc. on June 30, 2006? 3.
Should Carmen’s first three months of operation be characterized as “successful”? Explain. Facts Carmen Diaz opened up a ribbon shop on January of 2006 in the Coconut Grove section of Miami, Florida. She received a startup loan for $10,000 set for one year at 6% interest rate. She also invested $1,000 of her money in the equity of the business. Ribbons an’ Bows, Inc. was incorporated on March 1, 2006. Carmen’s uncle who is an attorney waived the incorporation fee of $600. Soon after her shop was incorporated she opened a bank account and deposited the $10,000 loan money as well as her $1,000 equity contribution.
She agreed to pay $600 per month at the end of each month for rent store space. The agreement was for 18 months, beginning April 1, 2006 with the last two months pre-paid out of the newly acquired bank account to the amount of $1200. The Ribbons an’ Bows, Inc. opened on April 1. The previous tenant left behind counters and displays, and re-painted at no cost to Carmen. Carmen ordered, received and paid for the stores opening inventory of accessories for $3,300. She acquired a cash register with credit-card processing capabilities for a refundable deposit of $250.
She also signed agreements with local phone and utility companies and paid for $200 in store supplies. Carmen then paid $150 for an ad in the local paper on April 2. Last, but not least, Carmen purchased a used desktop computer with business software for $2000. After these expenses, the bank account was left with $4,000 in cash on March 31. Carmen decided to expand by selling custom-designed ribbon table arrangements for special events. As a result Carmen she purchased a used sewing machine for $1,800 cash on May 1.
The investors asked Carmen to provide a financial report covering March 1st – June 30th. Upon review of this information, Carmen gathered the following. Customers paid $7,400 in cash for ribbons and accessories, but she was still owed $320 for a transaction on June 30. A part time employee was still owed $90 after being paid $1,510. Rent was paid in cash at the end of each month. Inventory replenishments costing $2,900 had been delivered and paid for by June 30. Carmen estimated the June 30th merchandise inventory on hand had cost $4,100.
Opening office supplies were almost all gone with an estimated $20 in supplies was left. Carmen did not know why Ribbons an’ Bows cash on June 30 was $3,390, which was less than the April 1 balance of $4,000. She also had trouble accounting for the following in her financial report. No interest had been paid on the investors’ loan. Related expenditures on the sewing machine and her computer could prove to have estimated useful lives of 5 and 2 years respectively with no resale value. She did not know how to account for the free legal work and cash register provided.
She also had not paid herself dividends for the four months of operations. If cash were available she would pay herself compensation sometime in July. Analysis 1. a. To report on the March to June operations, the analyst would have to put together and describe the company’s Statement of Income from that period. This would show Carmen’s investors whether the company made or lost money over the period of time being reported. As follows: Sales| 7,720 | COGS| (2,100)| Gross Margin| 5,620 | Employee Wages| (1,600)|
Rent| (1,800)| Office Supplies| (80)| Depreciation (Computer)| (250)| Depreciation (Sewing Machine)| (60)| Interest| (200)| Advertising| (150)| EBIT| 1,480 | b. The company was slightly profitable bringing in $1,480 before taxes. c. On the income statement, purchase of the sewing machine was stated as a $60 loss of income when it actually reduced cash by $1800 over its life. 2. The analyst would submit a balance sheet as of June 30 as follows: | | BALANCE SHEET| | | Assets| | | Liabilities| |
Cash| 3390| | Investor Loan| 10000| Accounts Receivable | 320| | Interest| 200| Inventories| 4100| | Wages| 90| Pre-Paid Rent| 1200| | Total| 10,290| Desktop CPU| 1750| | Equity| | Sewing Machine| 1740| | Carmen’s Equity| 1000| Cash Register Deposit| 250| | Income| 1480| Supplies| 20| | | 2480| Total| 12,770| | Total| 12,770| 3. Carmen’s first three months of operations would not be considered successful to the analyst because its profit of $1,480 over four months of operations is much less than the $5,200 she made over the same period as a cashier.