Read the following scenarios related to running a business, then work with your group to respond to the questions. As you share ideas, remember to follow the rules for group discussions:
• Take notes.
• Be courteous.
• Listen carefully to one another.
• Speak one at a time without interrupting.
• Support your statements with facts and details.
Finally, use the discussion and your notes to answer the questions.
Section 1: Analyzing a Balance Sheet
Omar and Janet own a small jewelry-supply business called Rings and Things. From January through April, the company generated a fair amount of business. However, Janet and Omar’s owner equity is lower than they had expected, and they seem to be losing money every month, even though sales are steady. Below is April’s balance sheet for Rings and Things.
Assets
Cash (bills and coins) $35
Bank checking account $1,997
Materials (beads and wires) $40
Finished jewelry $100
Office supplies $50
Furniture $100
Total $2,322
Liabilities
Balance on loans $925
Payroll $1,000
(1 salesperson who works 20 hours/month)
Total $1,925
Assets – Liabilities = Owner Equity
$2,322 total assets
– $1,925 total liabilities
= $407 owner equity
1. Based on the balance sheet for April, offer two ways in which Janet and Omar can increase their owner equity.
They should find a way to pay the loans off as soon as possible because that majority of liabilities every month.
2. Review the liabilities section of the balance sheet for Rings and Things. What problem can you identify with the payroll information, particularly as it relates to how much the one employee gets paid? What solution would you offer Janet and Omar?
Section 2: Analyzing Cash Flow
After reviewing their balance sheet, Omar and Janet create a profit-loss statement to see how much money they are spending versus how much money their business is bringing in.
Below is April’s cash-flow statement for Rings and Things.
Operating Activities
Cash in
Online sales $600
In-store sales $1,000
Total operating cash in $1,600
Cash out
Supplies ($300)
Labor ($1,000)
Rent ($350)
Utilities ($100)
Net operating activities –$150
1. Based on the profit-loss statement, does Rings and Things have a positive or negative cash flow? Why?
They have a negative cash flow. Because their net operating activities is not breaking even, in other words, they are losing money.
2. Based on the profit-loss statement, name two ways Janet and Omar can improve their cash flow.
3. Omar and Janet decide to revise their budget for Rings and Things. What suggestions about labor costs would you make, if the goal is to improve the business’s cash flow?
4. Omar and Janet are also trying to forecast what their federal and state income taxes will be at the end of the year. If Rings and Things had a negative cash flow of –$150.00 per month from January through April, but a positive cash flow of $1,000.00 per month (after expenses) from May through December, on what dollar amount will they determine their income taxes? What expenses could be used for tax deductions?"
Based on the balance sheet for April, offer two ways in which Janet and Omar can increase their owner equity.
a) Reduce payroll expenses
b) Increase online sales
c) Pay off loans
d) Invest in more office supplies