You do volunteer work for a local hospital auxiliary. The hospital supplies the stock to be sold at its gift shop. Even though the hospital is a not for profit organization, the goal of the gift shop is to break even or even earn a profit.
Unfortunately, the gift shop has been losing money for the hospital for quite some time. Since you have now have graduated with an Associate’s Degree from Kaplan University, the Gift 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
Although the revenue on snack food decreases every year, the cost of goods sold increases every year.
Red Flag 2
Some of the items in the gift 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 $14,000 at the beginning of the prior year, and $10,000 at the end of the prior year. The interest expense on the income statement for the year is $1,560.
Red Flag 4
The balance sheet shows that the checking account has over $20,000 in it, and the account does not pay interest. The gift shop does not have an interest bearing account.
Red Flag 5
You notice that in the floral cooler there are many flower arrangements that are seriously wilted.
Red Flag 6
There are five 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 sister 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 gift shop and tell how the red flag could be causing the gift shop to lose money. Also propose some measures you would take to help the gift shop improve net income. Your answer should be at least 100 words per Red Flag.
- 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