Question

Ted and Fred are the owners of a gas station. They invested SI50,000 each and pay an employee named Lawrence S35,000 per year. This year revenues are \(\$ 900,000,\) while costs are \(\$ 940,000 .\) Who is legally responsible for bearing the \(\$ 40,000\) loss? a. Lawrence. b. Ted. c. Fred. d. Ted and Fred. c. I awrence, Ted, and Fred.

Short answer

Ted and Fred are legally responsible for the $40,000 loss.

Step-by-step solution

Identify Key Information

Ted and Fred invested a total of \( \\(50,000 \times 2 = \\)100,000 \). The total revenue for the year is \( \\(900,000 \), while the total costs are \( \\)940,000 \), resulting in a \( \$40,000 \) loss. Lawrence is an employee, and his salary is part of the costs.

Define Relationships and Responsibilities

Ted and Fred, as owners, are responsible for the profits and losses of the business. Employees, like Lawrence, are not responsible for the business's financial outcomes beyond performing their job duties. Therefore, financial losses are typically the responsibility of the owners.

Analyze Legal and Financial Context

Business owners typically bear responsibility for financial losses. Since Ted and Fred own the gas station, they are the ones legally and financially accountable for the \( \$40,000 \) loss. Lawrence, as an employee, simply receives his salary and does not share in business losses.

Conclude Who Bears the Loss

Since Ted and Fred are the owners, they are legally and financially responsible for covering the \( \$40,000 \) loss incurred under their business operations. Lawrence, as an employee, is not responsible for this financial outcome.

Key concepts

Financial Loss in Business

When running a business, especially one with substantial investments and operations, understanding financial loss is crucial. Financial loss occurs when a company's expenses exceed its revenues, leading to a deficit. For example, Ted and Fred experienced a financial loss of \( \\(40,000 \) because their gas station's costs of \( \\)940,000 \) surpassed the revenue of \( \$900,000 \).

• This situation highlights the importance of effective financial management.
• It underscores the need to continuously monitor expenses against incomes.
• Financial losses can affect a business's ability to sustain operations or pursue expansion.

Business owners must strategize to minimize losses, which could involve cost-cutting, increasing revenue streams, or enhancing operational efficiency.

Employee vs Owner Liability

The distinction between employee and owner liability is fundamental in business. Employees, like Lawrence, are hired to perform specific tasks or roles in exchange for a salary. They do not share in the company's financial obligations or risks.

• Typically, employees are shielded from direct financial liability for the business's debts or losses.
• Their responsibility mainly involves fulfilling their job duties and adhering to company policies.

On the other hand, owners such as Ted and Fred are directly responsible for the company's financial health. As business owners, they must absorb any financial losses, as they have the ultimate control over business decisions. They invest personal resources and expect to earn a return, but they also take on the inherent risk of financial downturns.

Investment Risk

Investing in a business always comes with a degree of risk. Ted and Fred each invested \( \$50,000 \) into their gas station, and as owners, they accepted the possibility that they might not see a return on their investment. In business, investment risk refers to the chance that the actual returns on an investment will differ from its expected returns.

• This risk could result in minimal profit, no profit, or even financial loss.
• Understanding and managing investment risk is crucial for business owners.
• They should perform risk assessments and develop strategies to mitigate these risks.

An investor needs to weigh the potential rewards against the risks, ensuring that the potential returns justify the risk of loss.

Business Financial Responsibilities

Managing the finances of a business requires careful planning and responsibility. For Ted and Fred, this includes budgeting, controlling costs, and ensuring revenues remain strong. Owners are tasked with performing strategic financial planning to navigate business operations toward profitability.

• Their responsibilities involve maintaining accurate financial records and reports.
• They need to make informed business decisions to secure the company's financial health.
• Successful management may involve hiring financial advisors or leveraging financial tools.

Business financial responsibilities are not just about handling day-to-day expenses but also about preparing for future growth and potential market shifts. This proactive approach can help avoid financial pitfalls and ensure long-term success.