Case Solution Ribbon's an Bows, Inc.

1072 Words Aug 4th, 2013 5 Pages
Case 1-1: Ribbons an’ Bows, Inc.
Note: This case is unchanged from the Twelfth Edition.

Approach

This is an introductory case and it should be taught as an introductory case. There will be plenty of time in the course for the students to learn the correct form of financial statements and details of accounting standards. In short, the instructor should be prepared to allow a variety of formats for the financial statements and tolerate some “not quite correct” accounting.

The instructor may want to have students discuss Carmen’s March 31 statement, but the bulk of the class should focus on the three case questions. Any discussion of the March 31 statement should deal with the nature of the various accounts (i.e. prepaid rent is
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Question 3

Carmen’s business is off to a good start, but it will have to do better over the rest of the year if Carmen plans to pay herself any meaningful compensations and repay the cousins’ loan at the end of the year.

When discussing Question 3 some students believe that Carmen should include a consideration of an imputed compensation expense in deciding how well she has done. Students accept the non recognition of her compensation in the income statement, but believe she should recognize that personally she has incurred an opportunity cost for lost wages (at least four months x $1300).

In addition, students believe Carmen’s nonrecognition of any cost associated with using the abandoned counters and display equipment overstates how well she is doing from an economic point of view. These students would include some depreciation cost based on the asset’s fair value in their evaluation of how “successful” the business has been to date.

Some students advocate including the free legal advice’s value ($600) in their assessment of the company’s success to date.

The instructor may challenge the class to consider why these items (free legal advice, imputed salary and depreciation) are not included in the company’s income statement.

Exhibit 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

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