Ribbons an Bows

QUESTIONS
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.
2. On March 1, 2010, Carmen's uncle help him formally
incorporated her business and waive her legal fee.
3. On March, 2010, Carmen deposited the cousins' $10,000 loan
and her $1000 equity distribution. She also signed an agreement
to rent store space for $600 per month, paid on the last day of
the month. The agreement was for an 18-month period

beginning April 1. The agreement called for a prepayment of the

last two months' rent, which Carmen paid out of the company
bank account at the signing.
4. On March 31, Carmen reviewed the activity in the company's
cash bank account. She paid the following payment: the last two
months rent $1,200, opening the merchandise inventory $3,300,
cash register deposit $250, store supplies $100, April 2 edition
advertising $150, and used computer purchase $2,000.
5. On May 1, Carmen purchased a used commercial sewing
machine for $1,800 cash.
6. On July, Carmen sends the financial report covering the fourmonth period from March 1 to June 30 to her cousins. It
includes customers had paid $7,400 cash for ribbons and
accessories, but she was still owed $320 for ribbon agreements
for a large wedding delivered to the customer. A part-time
employee had been paid $1,510 but was still owed $90 for work
performance. Rent for the three-month period had been paid in
cash the end of each month. Inventory replenishments costing
$2,900 had been delivered. Carmen estimated the June 30
merchandise inventory on hand had cost $4,100. The small
opening office supplies inventory was nearly all gone. She
estimated supplies costing $20 had not been used.
7. She was puzzled by the fact that the cash in the company's
June 30 bank account was $3,390, which was less than the April
1 balance of $4,000.

8. Carmen was concerned about how she should reflect the

following in her financial report which are no interest had been
paid on the cousin's loan and the free legal performance by her
uncle and the free cash register provided by the local credit-card
charge processor.
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 THAT SAYS ITS PROFITABLET
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) |
Office Supplies | (80) |
Depreciation - Computer | (250) |
Depreciation - Sewing Machine | (60) |
Interest | (200) |
Advertising | (150) |
Profit Before Taxes | $1,480 |
1b Was the company profitable?

According to Exhibit 1, the company earned $1,480 before

taxes. Thus, the company was profitable.
1c. Why did its cash in the bank decline during the three-month
operating period?
Figure 2
Ribbon an Bows Cash Flows Analysis for the Period
April 1 to June 30, 2010
Beginning Cash | $4,000 |
Sales | 7,400 |
Wages | -1,510 |
Rent | -1800 |
Merchandise Inventory | -2,900 |
Sewing Machine | -1,800 |
Ending Cash | $3,390 |
According to income statement, the main reasons why the cash
balance declined during the three-month operating period are the
commercial sewing machine purchase reduced cash by $1,800
while the related depreciation charge only reduced income by
$60. Ending inventory was higher than beginning inventory and
the increase was paid with cash. That is, more inventories were
brought for cash ($2,900) than the cost of goods sale ($2100).

2. How would you report the financial condition of the business

on June 30, 2010?
Ribbons an Bows
Balance Sheet as of June 30, 2010
Assets | | Liabilities | |
Cash | $3,390 | Wages Owed | $90 |
Accounts Receivable | 320 | Interest Owed | 200 |
Merchandise Inventory | 4,100 | Cousins Loan | 10,000 |
Supplies | 20 | | $10,290 |
Prepaid Rent | 1,200 | Owners Equity | |
Computer | 1,750 | Carmens Equity | $1,000 |
Sewing Machine | 1,740 | Earnings | 1,480 |
Cash Register Deposit | 250 | | $2,480 |
Total | $12,770 | | $12,770 |
3. Do you believe Carmen's first three months of operation could
be characterized as "successful"? Explain your answer.
I believe Carman's business is "successful". But, in order to do
better over the rest of the year, Carman should pay herself some
meaningful compensation and repay the cousin's loan at the end
of the year.

The Conclusions (solution and/or recommendation: issue)

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.

ANALYSIS THAT SAYS NOT PROFITABLE

1a. How would you report on the three-month operations of
Ribbons an Bows, Inc.,
through June 30?
Ribbons an Bows remains in the black at the end of the three
month period given to us in the case. However, several items
need to be considered to have a good understanding of the
state of the company from a profitability standpoint: all monies
going out (debited), and all monies already in (credited).

1b. Was the company profitable?

On paper, the company looks profitable with the money it has
available in the bank keeping it in the black. Looking only at the
differences in the credits and debits over the three month
period, we could justifiably say no, the company was not
profitable. A total of $8,010.00 went out to cover expenses
(wages, inventory, etc.), with only $7,400.00 cash coming in,
and $320 receivable. The difference coming to the $3,390
ending balance, and explaining that the expenses exceeded the
revenues.
1c. Why did its cash in the bank decline during the three-month
period?
Looking above at 1b, we see that Ribbons an Bows had
expenses that exceeded their revenues. Where the company to
have no other working cash in the company bank account,
Ribbons an Bows financial sheets would show their accounts
in the red. However, Carmen had extra working capital in the
amount of $4,000, from which the excess expenses of $610 was
drawn. Expenses exceeded revenues, leaving the working
capital as the only source to draw the excess from.
How would you report the financial condition of the business
on June 30, 2006?

Again, I would report the financial condition as not yet

profitable while the bank account reflects an available balance
of $3,390. Additionally this doesnt account for a salary due to
Carmen.
Do you believe Carmens first three months of operation could
be characterized as successful? Explain your answer.
From a pure profit point of view, no. The company would be in
the red were it not for the excess cash of $4,000 from the loan
and equity investment at the initial launch.
From a financial planning point of view, one could say yes. It
could be argued that Carmen had foresight to ask for the
$10,000 loan understanding that the extra cash would cover
unforeseen expenses. In this case, Carmens business plan
changed to expand for customization of table arrangements.