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Do business losses mean closing the doors

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If a firm makes a loss in the short run, should it shut down? If no, discuss. If yes, discuss.Offer examples

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First we have to distinguish what a loss represents. On the books, an accounting loss means that the firm spent more money than it received. And remember that this loss is usually reported AFTER the event has occurred - usually 30-60 days after the operational cycle, or calendar/fiscal year. As such, just like reporting a profit, it may have very little meaning from an operational standpoint.

The real measurement from a financial standpoint that we are interested in is CASH FLOW. Does the firm have the ability to increase cash from its operations and pay its bills in the short run? Does it have the ability to borrow to cover short term costs as it is collecting cash for its use? These are the important items which a firm needs to understand before closing its doors. Further, does it have the ability to increase its sales, while controlling its costs to establish a sustainable business model?

A few examples will illustrate this concept. It took AOL 13 years to report its first profit, yet it kept operating at a "LOSS", but creating cash flow to maintain its operations until this was achieved. ...

Solution Summary

A discussion of factors to be considered when thinking of closing a business firm is given.

See Also This Related BrainMass Solution

Partnership, "double taxation" of corporate income, limited partnerships, close corporation, sole proprietorship, foreign corporation, subchapter S corporation.

Give the correct response for each question.

Question 1 Sue, Rusty and Yvette agree to put in $1,000 each to set up a shelter for lost animals. They each work two days a week. Donations fund the day-to-day operations and are used for food, medicine and other necessities for the animals. Do they have a partnership?

Answer Choices
a. Yes, since each has control of the operation.
b. Yes, because they are all co-equal in ownership of the shelter.
c No, because there is no business.
d Yes, because the business is run for a profit.

Question 2 Serrie and Al and their two daughters have operated a business out of their home for years and are thinking about incorporating. They would like to avoid the "double taxation" of corporate income. Which of the following types of corporations would allow them to avoid this disadvantage of the corporate form?

Answer Choices
a. A professional corporation
b. A subchapter S corporation
c A close corporation
d An unincorporated association

Question 3 A corporation formed in one state but doing business in another state is referred to in that other state as
Student response:
Answer Choices
a. an alien corporation.
b. a foreign corporation.
c an S corporation.
d a non-profit corporation.

Question 4 Because limited partnerships are governed by state statute, they must comply fully with applicable state laws because noncompliance

Answer Choices
a. will result in the automatic dissolution of the partnership.
b. will cause the limited partnership to become a general partnership.
c. will subject the partners to criminal prosecution.
d. will subject the partners to limited liability.

Question 5 Which of the following statements is true?

Answer Choices
a. Partnerships are creatures of statute rather than the common law.
b. The personal net worth of any general partner is exempt from partnership obligations.
c. A partner's profits from partnership is taxed as individual income.
d. A partnership is very similar to a corporation.

Question 6 Assume that Morgan, a would-be tycoon, decides to go into business for himself selling red socks door-to-door. If he wishes to avoid unncessary costs and legal fees by setting up the simplest form of business, he should establish
Student response:
Answer Choices

b. a corporation.
c. a sole proprietorship.
d. a partnership.
e. a franchise.

Question 7 A private, for-profit corporation that (1) was formed for the purpose of manufacturing and distributing a newly patented kitchen applicance, (2) is owned by five shareholders, (3) is subject to double taxation, and (4) has made no public offering of its shares would be classified as
Student response:
Response Answer Choices
a. an S corporation.
b. a close corporation.
d. a professional corporation.
e. a publicly traded association.

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