Income Statement

Revenue
Pre-paid Rent
Office supplies
Bills
EBITDA
Depreciation
EBIT
Interest
Net income

Balance Sheet
47000
-6000
-1700
-33000
6300
1624
4676
233
4443

Disclaimer:
We have rounded off to the nearest integer

Notes:
Interest is calculated from 22nd June [71 days]
Depreciation is calculated as below:
1574 : Depreciation on the first set of Assets over 64 days
50 : Depreciation on the second set of Assets over 5 days

Assets
Liabilities
Cash or Cash Equivalent
6600
Accounts Receivable
7000
Inventory
4200
Equipment
36376
Pre-paid Rent
6000
Loans Payable
20000
Owner's Equity
30000
Accounts Payable
5500
Unpaid Interest
233
Retained Earnings
4443
60176
60176

23800

Cash Flow
Income from operating activities (OA)
Cash in
cash out (Rent and Salaries)
Net cash from OA
Income from financing activities
none
Income from investing
Cash out purchase of equipment/ supplies
Net decrease in cash
Cash before start
Closing Cash Balance

40000
-39000
1000

-6400
-5400
12000
6600

Answer:

How would you have reported on the financial effects of the operations of Maria Hernandez & Associates through
August 31, 2004?
As of August 31 2004, the company made a profit of $4,443 (9% net profit margin), indicating that the business
has been profitable.
Did the company made a profit as Maria believed? If so, how would you explain why the cash in the bank has
declined? 2. How would you report the financial status of the business on August 31, 2004?

Yes, the company made profits as Maria believed. From the income statement, it is evident that the cost incurred to
generate work is lesser than the revenue it generates. This is the basic profit making foundation for all businesses.
Answer: A reduction in the cash balance of $5,400 is mainly due to total cash-outflows of $45,400 and inflows of $40000.
The outflows represent expenses for her business i.e. salaries and assets (prepaid rent, equipment, supplies). The
financial status of the overall business is healthy at least in the short term.
3

In your opinion, do you think that the financial position is healthy?

In the short run (less than a year), the financial position of the company appears healthy as the current assets are
worth $23800. Even after discounting the cash ($6600), the current assets ($17,200) are 3 times enough to cover
the current liabilities ($5733). Also, given that the accounts receivable is $7000 and accounts payable is $5500,
Answer: the company enjoys a better credit period as against the terms they offer to the customers. As a result the working
capital does not seem to be in any short term danger. In the long term, the company's fixed assets are $ 36,376
and the long term liabilities and equity are $54,443. This implies that the company needs to repay its loan with the
profits it generates or else use the profits to generate more fixed assets to cover the liabilities.