Chapter 1, Problem 1.2AP

Analyzing a Student’s Business and Preparing an Income Statement

Upon graduation from high school, Sam List immediately accepted a job as an electrician’s assistant for a large local electrical repair company. After three years of hard work, Sam received an electrician’s license and decided to start his own business. He had saved $12,000, which he invested in the business. First, he transferred this amount from his savings account to a business bank account for List Electric Repair Company, Incorporated. His lawyer had advised him to start as a corporation. He then purchased a used panel truck for $9,000 cash and secondhand tools for $1,500; rented space in a small building; inserted an ad in the local paper, and opened the doors on October 1. Immediately, Sam was very busy; after one month, he employed an assistant.

Although Sam knew practically nothing about the financial side of the business, he realized that a number of reports were required and that costs and collections had to be controlled carefully. At the end of the year, prompted in part by concern about his income tax situation (previously he had to report only salary). Sam recognized the need for financial statements. His wife Janet developed some financial statements for the business. On December 31, with the help of a friend, she gathered the following data for the three months just ended. Bank account deposits of collections for electric repair services totaled $32,000. The following checks had been written: electrician’s assistant, $7,500; payroll taxes, $175; supplies purchased and used on jobs, $9,500; oil, gas, and maintenance on truck, $1,200: insurance, $700; rent, $500; utilities and telephone, $825: and miscellaneous expenses (including advertising), $600. Also, uncollected bills to customers for electric repair services amounted to $3,500. The $250 rent for December had not been paid. Sam estimated the cost of using the truck and tools (depreciation) during the three months to be $1,200. Income taxes for the three-month period were $3,930.

Required:

1. 1. Prepare a quarterly income statement for last Electric Repair for the three months October through December. Use the following main captions: Revenues from Services. Expenses. Pretax Income, and Net Income.
2. 2. Do you think that Sam may need one or more additional financial reports for the quarter and thereafter? Explain.