At the beginning of the summer, Ted Coe was looking for a way to earn money to p

Question

At the beginning of the summer, Ted Coe was looking for a way to earn money to pay for his coilege tuition in the fall. He decided to start a lawn service business in his neighborhood. To get the business started, Ted used $3,000 from his savings account to open a checking account for his new business, Elegant Lawn Care. He purchased two used power mowers and various lawn care tools for $1,000, and paid $1,800 for a second-hand truck to transport the mowers. Several of his neighbors hired him to cut their grass on a weekly basis. He sent these customers monthly bills. By the end of the summer, they had paid him $600 in cash and owed him another $1,150. Ted also cut grass on an as-needed basis for other neighbors who paid him $500. During the summer, Ted spent $200 for gasoline for the truck and mowers. He paid $500 to a friend who helped him on several occasions. An advertisement in the local paper cost $100. Now, at the end of the summer, Ted is concerned because he has only $500 left in his checking account. He says, "I worked hard all summer and have only $500 to show for it. It would have been better to leave the money in the bank." Prepare an income statement, a statement of owner's equity, and a balance sheet for Elegant Lawn Care (three months ended August 31, 2014). Explain (put in writing assuming you are writing it to him) to Ted whether or not he is "better off" then he was at the beginning of the summer. (Hint: use T accounts in organizing the data.)

Explanation / Answer

Solution 1:

Solution 2:

Dear Ted,

You are better off than you were in beginning of summer though you are having $500 cash at the end of this quarter. You have invested $3,000 in your business, now you total assets worth $4,450 and you have earned $1,450 in this quarter. Cash is not only the criteria to measure the profits of business. You are having $1,150 in accounts receivables that will be converted in cash in future when collected from customer. Further you are having fixed assets of $2,800 to be used in this business. These assets having value when same is converted in to cash.

Income Statement - Ted Coe
For the quarter ended August 31, 2014 Particulars Amount Service revenue ($600 + $1,150 + $500) $2,250.00 Operating expenses: Gasoline Expenses $200.00 Consultancy charges $500.00 Advertisement Expense $100.00 Total Operating Expenses $800.00 Net Income $1,450.00

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