Case 1-1: Ribbons an’ Bows, Inc.
Comments on Information Gathered and Carmen’s Concerns
The three month sales total is the sum of the cash sales ($7,400) and credit sales ($320).
Cost of sales is derived from the following equation
Beginning merchandise inventory $3,300
Plus Purchases 2,900
Equals Total available merchandise $6,200
Less Ending merchandise inventory 4,100
Equals Cost of sales $2,100
Rent expense is $1,800 of $600 per month times three months. Paid in cash.
Part-time employee expenses ($1600) is the sum of cash paid ($1510) plus amount owed ($90).
Supplies expense ($80) is beginning supplies inventory ($100) less supplies inventory on hand on ...view middle of the document...
The uncle’s legal work is neither an asset nor an expense of the business. It did not result in a business transaction.
Carmen’s potential salary payment in July is neither an expense nor a liability as of March 31. The company does not have an obligation on March 31 to pay her any compensation.
Exhibit 1 presents the company’s initial three month income statement. It does not contain a provision for taxes, since Carmen at this early date did not know if income taxes would be due on the annual results.
The principal reasons why the cash balance declined during the three month profitable operating period are:
The commercial sewing machine purchase reduced cash by $1,800 while the related depreciation charge only reduced income by $90.
Ending inventory was higher than beginning inventory and the increase was paid for with cash. That is, more inventory was bought for cash ($2,900) than the cost of goods sold ($2,100).
Exhibit 2 present a cash flow analysis for the three month operating period.
Exhibit 3 presents the company’s June 30 balance sheet.
Carmen’s business is off to a good start, but it will have to...