Fundamentals of International

Financial Reporting
Ribbons an' Bows Inc

GROUP 1
21PGIB061  Abhishek Prakash Mishra
21PGIB081  Priyam Agarwal
21PGIB102  Shobhit Rastogi
21PGIB091  Rohit Majumder
21PGIB071  Namit Jalota
21PGIB112  Tushar Jairath   
Analysis of the Case
Carmen Diaz wants to make a ribbon shop. To start the business, her cousins agreed to give a
loan of $10,000 for a year at 6% interest rate. She herself is ready to invest $1000 as equity.
Her uncle agreed to waive a fee of $600 for handling the legal aspects
Store place rent- $600/month, 18 months period; Sewing machine - $1800
After running the business for 4 months, Carmen was reviewing the financial report which was to
be sent to her cousins
She was concerned as there were some major flaws in the report.
1. No interest was paid on her cousin's loans
2. Free legal services performed by her uncle and the free cash register was not included
3. The report did not include her own salary during the four months of operation. Before the business she
 worked as a cashier at a local grocery store for $1300/month.
4. Expenses on the computer and related software was not added.
Ribbon an' Bows P/L Statement (April 1 to June 30, 2006)
Particulars Values (in $) Q.1. How would you report on
Total Sales 7,720 the three-month operations of
Ribbons an’ Bows, Inc., through
Cost of Material 2,100
June 30? Was the company
        Opening Inventory 3,300 profitable? (Ignore in- come
        Add in Inventory 2,900 taxes.) Why did its cash in the
        Closing Inventory (4,100) bank de- cline during the three-
Employee Cost 1,600 month operating period?
Rent 1,800
Office Supplies 80
It can be inferred from the P/L
        Opening balance 100
statement for Ribbons an' Bows for
        Closing balance 20
the period April1 to June 30,
TOTAL EXPENSES 5,580
2006 that the company is profitable
EBITDA 2,140 and has generated a profit of $1,480
Depreciation April-June (Computers) 250
Depreciation May-June(Sewing machines) 60
EBIT 1830
Interest 200
Other costs (Prepaid advertising) 150
Profit Before Tax 1,480
 Cashflow Statement
Period April 1, 2006 to June 30, 2006
Particulars Values (in $)
Opening Balance 4000
Operating Cashflows
As observed from Income statement and cash flow of
Cash Inflow Ribbons an' Bows, following are the major reasons for
     Sales 7400 decline in cash balance :

 Closing balance of inventory is higher than opening

Cash Outflow balance. This implies that excess inventory of $800
was bought
     Wages (1510)
     Rent (1800)  Purchase of Sewing machine also accounted for cash
outflow of $1800
     Inventory Replenishment (2900)
     Sewing Machine Purchase (1800)
Closing balance 3390
 Q.2.  How would you report the
Ribbon an' Bows Balance Sheet (April 1 to June 30, 2006) financial conditional of the business on
Particulars Values (in $) Particulars Values (in $) June 30, 2006?
ASSETS Equity
Non-Current Assets Reserves and 1,480 The following can be inferred from
Surplus the Balance Sheet for Ribbons an'
Machineries – Sewing 3,490 Initial Investment 1,000 Bows:
Machine & Computer  Debt to Equity ratio is 4.15 which
Current Assets Total Equity 2,480 is very high and poses a risk to the
Cash 3,390 stakeholder
Accounts Receivable 320 Liabilities  Current Ratio is 0.76, Quick Ratio
Inventory 4,100 Loan 10,000 is 0.36 which is less than 1 which
indicates that she cannot meet
Rent Prepaid 1,200 Salary Payable 90
her short term obligations but she
Office Supplies 20 Interest Payable 200 has sufficient inventory to
Cash Register Deposit 250 Total Liabilities 10,290 continue operations 
Total Assets 12,770 Total Equity and 12,770  We are also profitable as she has
Liabilities added 1,480 to Reserves and
surplus within 3 months
Financial Ratios
As per the data -:
Ratios • Gross profit margin is 72.8%,
Current ratio 0.761 which is considered to be a
healthy margin.
Quick ratio 0.362 • Net Profit margin is 19.2%and a
margin above 15% is considered
Gross Profit Margin 0.728 good.
Net Profit Margin 0.192 • Return on equity is 59.7% which is
great for a recently started
Cash Ratio 0.329 business.
Debt to Equity 4.149 • Interest coverage ratio is 10.7
which indicates its ability to
Debt to Assets 0.806 pay off its debt.
Inventory Turnover 3.766
Interest Coverage ratio 10.700
Operating Margin 0.277
ROE 0.597
Q.3. Do you believe Carmen’s first three months of- operation could
be characterized as “successful”? Explain your answer.  

Yes , we think that Carmen’s first three months of- operation could be characterized as

"Successful". The rationale behind this is stated below :

 Profit Before Tax : $1480 which is about 20% of the sales , with the growth in sales the
business will become more profitable.
 She has also left with inventory of $4100 which shows that the operations could continue
with this.
 Company has also purchased assets and is still profitable, which is a good sign.