The financial statements of a company are the most objective way to assess the health of an organization. As the old adage says, “numbers don’t lie.” The financial statements can show the first signs of trouble within a company. To help you recognize what the numbers are trying to tell you, red flags can serve as indicators of trouble to you or anyone else reviewing the statements.
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You work for a local manufacturing business that also has a small shop that sells its products. The business supplies the stock to be sold at its shop as well as some snacks and drinks. The goal of the shop is to break even or even earn a profit.
Unfortunately, the shop has been losing money for quite some time. Since you have now have graduated with an Associate’s degree from Purdue University Global, the shop manager has asked you to examine the financial statements for the past five years to see if you can suggest any ways to improve the bottom line.
In your analysis, you discover the following six potential problems or “Red Flags.”
Red Flag 1
The revenue on snack food decreases every year while the cost of goods sold increases every year.
Red Flag 2
Some of the items in the shop appear dusty and “shopworn.”
Red Flag 3
In your examination of the financial statements, you see that there is a bank loan on the books. The average balance of the loan is $10,000 at the beginning of the prior year, and $6,000 at the end of the prior year. The interest expense on the income statement for the year is $1,740.
Red Flag 4
The balance sheet shows that the checking account has over $15,000 in it, and the account does not pay interest. The shop does not have an interest bearing account.
Red Flag 5
You notice that in the refrigerator there are many items that are not cold.
Red Flag 6
There are four paid employees, one full-time and the remainder part-time. The fulltime employee acts as “Procurement Manager” and purchases the stock, which is to be resold. She places purchase orders, receives the goods, and pays vendors. Her brother is also a part-time employee.
Address all six of the Red Flags and apply them to the task given to you to see if you can improve the bottom line. Tell why each red flag presents a potential problem for the shop and explain how the red flag could be causing the shop to lose money. Also propose some measures you would help the shop improve net income. Your answer should be at least 100 words per Red Flag.
- Take a screen shot of the Income Statement and Balance Sheet Learning Activity upon completion and insert it at the top of your Assignment document.
- Calculate each red flag’s impact on either revenues or expenses
- Calculate each red flag’s impact on profitability
- Show a potential remedy or solution to address each red flag