Word has gotten around that you know accounting and can explain it well. Jim, another of your friends has a unique business. During the summer, he buys hats that cost $5.00 each and sells them at the beach for $12.00 each. Other than the cost of the hat, his only other expense last summer was $120 for parking. He sold 78 hats last summer. His accountant prepared a financial statement for him and he has several questions about the income statement. He asks:
1. What does the cost of goods sold and gross profit mean?
2. How much gross profit do I make on each hat?
3. Why show both gross profit and net income?
4. If I have hats returned or a give a discount, how will that be shown on the income statement?
1. Is it important for a company to follow a strict budget even though they may be experiencing phenomenal profits? Do you think that there will be a bias towards greed when creating the budget for this company? Explain.
2. How does management greed influence budget decisions?
Please consider each of the questions separately in this post. It is important for you to understand the value of the budget as a blueprint for the business – even in times of exceptional “good news”.
It is also important to consider the role of greed within the budgeting process of the firm. Perhaps you might want to think about the budget as a communication to employees about what ownership and management believes is its focus.
You might even want to see if any other of the exceptional “bad boys” in the business world were reflecting their greed even within their budgeting documents.