Assignment
1). Anne Marie, the owner of Anne's Beauty Salon, comes to see you again. She tells you that she just got her year-end set of financial statements from her accountant and is more confused. Here are her questions.
1. I have very lithe cash and yet he says that I had a good year with $15,000 net income. He said it was because we use accrual accounting (whatever that means). I know I paid 6 month's rent ($1,400 a month) in advance at the end of the year. I also paid my insurance for the next year. Insurance cost $6,000. I have several customers who had a lot of services done on credit and haven't paid yet I think that totals $11,948 owed to me. Can you explain?
2. I was paid $200 in advance for some hair coloring I will do in January. He tells me that's a liability. That doesn't make any sense to me? Please explain.
3. In December I did several hair several haircuts during the last week of the year and sent bills to all the customers? When is that counted?
Howwould you answer these questions?
2). Companies often use leverage to augment profits. Based on what you learned this week, please explain the following in detail:
• With regards to Operating Leverage, please explain why a company with HIGH Operating Leverage faces greater financial risk in a declining sales period compared to a company with LOW Operating Leverage. (HINT The key here is the relation between fixed costs and variable costs.)
• What does a business's Contribution Margin represent? What does the Contribution Margin have to do with Operating Leverage?