Heather and Dan Holt met while both were employed in the interior trim and upholstery department of an auto manufacturer. After their marriage, they decided to earnsomeextra income by doing small jobs involving canvas, vinyl, and upholstered products. Their work was considered excellent, and at the urging of their customers, they decided to go into business for themselves, operating out of the basement of the house they owned. To do this, they invested $120,000 cash in their business. They spent $10,500 for a sewing machine (expected life 10 years) and $12,000 for other miscelianeous tools and equipment (expected life 5 years). They undertook only custom work, with the customers purchasing the required materials, to avoid stocking any inventory other than supplies. Generally, they required an advance deposit on all jobs.The business seemed successful from the start, as the Holts received orders from many customers. But they felt something was wrong. They worked hard and charged competitive prices. Yet there seemed to be barely enough cash available from the business to cover immediate personal needs. Summarized, the checkbook of the business far 2002, their second year of operations, showed:Balance, January 1,2002                     balance, 12/31102                                                                            $99,200 cash received from customers        for work done in 2001                               $36,000   for work done in 2002                                 200,000   for work to be done in 2003                        48,000                                                                                                                                              284,000                                                                                                        383,200Cash paid out:    Two years insurance policy, dated 1/1/02      $19,200   Utilities                                                               48,000   supplies                                                              104,000                        other expenses                                                    72,000   taxes, including sales taxes                                 26,400   dividends                                                            40,000                                                                                                                                       309,600balance, 12/31/02                                                                         $73,600                                                                                                                                                                                               Considering how much they worked, the Holts were concerned that the cash balance decreased by $25,600 even though they only received dividends of $40,000. Their combined income from the auto manufacturer had been $65,000. They were seriously considering giving up their business and going back to work for the auto manufacturer. They turned to you for advice. You discovered the following:Of the supplies purchased in2002, $24,000 were used on jobs billed to customers in 2002; no supplies were used for any other work.Work completed in2002 and billed to customers for which cash had not yet been received by year-end amounted to $40,000.Your first step in the analysis is to rough out an income statement for the Holts in2002

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Asked Sep 5, 2019
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Heather and Dan Holt met while both were employed in the interior trim and upholstery department of an auto manufacturer. After their marriage, they decided to earnsomeextra income by doing small jobs involving canvas, vinyl, and upholstered products. Their work was considered excellent, and at the urging of their customers, they decided to go into business for themselves, operating out of the basement of the house they owned. To do this, they invested $120,000 cash in their business. They spent $10,500 for a sewing machine (expected life 10 years) and $12,000 for other miscelianeous tools and equipment (expected life 5 years). They undertook only custom work, with the customers purchasing the required materials, to avoid stocking any inventory other than supplies. Generally, they required an advance deposit on all jobs.

The business seemed successful from the start, as the Holts received orders from many customers. But they felt something was wrong. They worked hard and charged competitive prices. Yet there seemed to be barely enough cash available from the business to cover immediate personal needs. Summarized, the checkbook of the business far 2002, their second year of operations, showed:

Balance, January 1,2002                    

 

balance, 12/31102                                                                            $99,200

 cash received from customers    

    for work done in 2001                               $36,000

   for work done in 2002                                 200,000

   for work to be done in 2003                        48,000                                                                                                                                              284,000

                                                                                                        383,200

Cash paid out:

    Two years insurance policy, dated 1/1/02      $19,200

   Utilities                                                               48,000

   supplies                                                              104,000                     

   other expenses                                                    72,000

   taxes, including sales taxes                                 26,400

   dividends                                                            40,000                                                                                                                                       309,600

balance, 12/31/02                                                                         $73,600                                                                                                                                                                                               

Considering how much they worked, the Holts were concerned that the cash balance decreased by $25,600 even though they only received dividends of $40,000. Their combined income from the auto manufacturer had been $65,000. They were seriously considering giving up their business and going back to work for the auto manufacturer. They turned to you for advice. You discovered the following:

  1. Of the supplies purchased in2002, $24,000 were used on jobs billed to customers in 2002; no supplies were used for any other work.
  2. Work completed in2002 and billed to customers for which cash had not yet been received by year-end amounted to $40,000.

Your first step in the analysis is to rough out an income statement for the Holts in2002

                             

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Expert Answer

Step 1

Income statement is a statement that helps in calculating the income or the profit and loss of a firm. The total expenses are deducted from total revenues to find out the net profit or loss.

Step 2

Working notes:

  • Total revenue= Cash revenue + Credit revenue

                      = $200,000 + $40,000

                      = $240,000

  • The a...
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Depreciation expense= S1,050 $2,400= $3,450 Depreciation on sewing machine-Cost of machine-Scrap value Life of asset $10,500 0 10 =$1,050 Depreciation on Tools and equipments= Cost of machine-Scrap value Life of asset $12,000 0 5 - $2,400

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