Linda Lopez opened a beauty studio, Linda’s Salon, on January 2, 2011. The salon also sells beauty supplies. In January 2012, Lopez realized she had never filed any tax reports for her business and therefore probably owes a considerable amount of taxes. Since she has limited experience in running a business, she has brought you all her business records, including a checkbook, canceled checks, deposit slips, suppliers’ invoices, a notice of annual property taxes of $1,970 due to the city, and a promissory note to her father-in-law for $3,000. She wants you to determine what her business owes the government and other parties.
You analyze all her records and determine the following as of December 31, 2011:
Unpaid invoices for beauty supplies .......... $7,500
Beauty supplies sales (excluding sales tax) ....... 39,430
Cost of beauty supplies sold ............ 27,631
Workers’ salaries ................. 17,750
Service revenues .................. 51,900
Current assets ................... 15,800
Beauty supplies inventory .............. 9,980
You learn that the company has deducted $516 from the two employees’ salaries for federal income taxes owed to the government. The current social security tax is 6.2 percent on maximum earnings of $106,800 for each employee, and the current Medicare tax is 1.45 percent (no maximum earnings). The FUTA tax is 5.4 percent to the state and 0.8 percent to the federal government on the first $7,000 earned by each employee, and both employees earned more than $7,000. Lopez has not filed a sales tax report to the state (5 percent of sales).

1. Given these limited facts, determine Linda’s Salon’s current liabilities as of December 31, 2011.
2. What additional information would you want from Lopez to be sure that all current liabilities have been identified?
3. Evaluate Lopez’s liquidity by calculating working capital, payables turnover, and days’ payable. Comment on the results.

  • CreatedSeptember 10, 2014
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