Ethan's new rm

Ethan's new rm Alejandro Serrano Aug 6, 2008. Updated Sep 4, 2008 On Jan 2, 2008 Ethan Buell and his friend Ryan had just started their own business to import the product X from Germany and sell it in the US. That product had been succesfully launched in Germany the previous year, what made Ethan and Ryan think theirs would be a sound business. Carefully read the facts described below and then try to answer the ques- tions at the end of the document. 1 Facts from Jan 2, 2008 till Jan 8, 2008 1. On Jan 2nd, Ethan and Ryan made a deposit in a bank account to start the business, $10,000 each. 2. On Jan 3rd, they rented a store for the following three months. They paid upfront for the rent ($6,000 for three months). 3. On the same day, a $12,000 loan was raised from a local bank, at an interest of 10% per year. The loan was expected to be returned six months later. 4. On Jan 4th, they bought some equipment, necessary to run the busi- ness. They paid $10,000 cash. Ryan estimated the equipment would last about three years. 5. On Jan 6th, The rst batch of product X was bought. The cost was $35,000; only $11,000 was paid in cash. Adapted from \Todos nosotros S.A." Rev. 07/01, Raul Ibanez, IESE Business School 1 6. On Jan 7th, some defective units (worth $5,000) were returned to the supplier, who agreed to take the parts back. 7. On Jan 8th, the store was open to start selling. 2 Facts from Jan 9, 2008 till Jan 31, 2008 8. On Jan 9th, a student was hired to be in charge of the store. She started working on Jan 10th; her salary was $1,600 per month 9. Sales during the month were worth $50,000; 80% of that amount was paid cash by customers. The cost of the units sold had been $30,000. 10. A payment was made to the supplier so that credit was reduced by $14,000. 11. The rm collected $6,000 from customers (out of $10,000). The re- maining amount was expected to be collected the following month. 12. The student received $1,000 cash. On Jan 31st the rm still owed her $100, expected to be paid in a couple of days. 13. On Jan 30th, a second batch of product X was bought. The cost was $40,000, but was not paid cash. 14. On Jan 31st, Ethan received a call from an important retailer, who showed interest to buy a large amount of product X on a regular basis. 15. January utilities totaled $350, which were paid cash within the month. 16. Nothing was paid to the bank as loan interest in January. 17. On Jan 31st, the rm recognized the expense of the rent for January. 3 Questions 1. Discuss if Financial Accounting can help Ethan and Ryan to assess the value of the rm during the rst month of operations. 2 2. Prepare the Balance Sheet of the rm on Jan 2nd, Jan 8th, and Jan 31st. 3. Assess whether the rm has earned money or not in January. What criteria did you use? 4. How and why did cash change in January? What is the cash position at the end of the month? Is this value identical to the prot (loss) calculated previously? Why? 5. Would it be useful to prepare a report showing investment and nancing decisions made in January? Is it possible to calculate it given the information provided? 3