Case Study: Donahoo’s
Question 1: What did Donahoo’s balance sheet look like at the outset of the firm’s life?
From the beginning of January 2011, Donahoo’s balance sheet showed what he bought for his furniture store, and also what he gained from those purchases. Anything he bought can be looked at as a negative in numbers, and anything he received can be looked at as a positive on the balance sheet.
Question 2: What did the firm’s balance sheet look like after each transaction?
After each transaction, it showed how Donahoo would be going negative for a little while, before he was actually about to make a profit and order more products for the furniture store in order to sell them.
Question 3: Ignoring taxes, determine how much income Donahoo earned during January. Prepare an income statement for the month. Recognize an interest expense of 1 percent for the month (12 percent annually) on the $500,000 long-term debt, which has not been paid but is owed.
January 1st through January 31st
Gross Profits/Operating Profits: $150
Interest Expense (1%): 5
Net Income: $145
Question 4: What was Donahoo’s cash flow for the month of January?
The month of January seemed to be a little rocky for Donahoo. He had a constant flow of money coming in and money coming out. When he would purchase more furniture for his store in order to sell it, he would usually make some of that money back but other times he would actually be going negative.