I have been asked to share my opinion on the financial standing, profitability, why the decline in cash after three months, and whether I consider the first three months successful for the business, Ribbons an’ Bows. The summary of the financial situation is presented below, followed by my opinion of the situation.
Carmen Diaz opened Ribbons an’ Bows, Inc. on April 1, 2010 from the help of two cousins loaning a total amount of $10,000 and her own contribution of $1,000. She did not have to pay the fee of the lawyer since it was her uncle, which saved her $600. Carmen also found rental space costing $600 a month and had to pay the last two months of rent upfront on an 18-month lease. No furniture or display cases were needed because they came with the property, the cash register was free with a refundable deposit of $250, and she purchased a used computer with basic business software for $2,000. Carmen also purchased merchandise inventory costing $3,300, store supplies costing $100, and an advertisement in the April 2 edition of the newspaper costing $150. After being open a month she purchased a sewing machine costing $1,800 for making table arrangements for weddings and special events. After three months she noticed that her bank account was $3,390, which was $610 less than what she had on April 1. She believes that her first three months were profitable, but her bank account shows the opposite. There is an explanation for this, and it can be proven that she has been profitable, but some other business aspects need to be addressed.
When looking at the cash in the bank you could say the company was not profitable, but if you look a little deeper at the income statement I would say otherwise. The profit was $1,480. The reason that the ending cash balance decreased in the three-month operating period was because of the purchase of the sewing machine after the company had been in business for a month. Also, another reason why the cash declined was that the ending inventory was greater than the beginning inventory because of the purchase of $2900 of inventory. This amount is also more than the cost of goods sold, which tells us that more money is spent on the inventory.
If I were to report the financial condition of the business on June 30, 2010 to Carmen’s cousins, I would present it to them in a balance sheet. The balance sheet would help show the transactions that do not have specific dates, but still show how well the company is doing. It will help display all of her assets, liabilities, and equities.
Finally, I would characterize the company as a success because of a couple reasons. First of all, at the start of the company she acquired many free assets that included waived lawyer fees, free display tables, and a cash register that she only had to pay a $250 deposit. These savings, her investments into the…