Please prepare an income statement for Classic Upholstery Shop. Tyler Smith has

Question

Please prepare an income statement for Classic Upholstery Shop.

Tyler Smith has worked in an upholstery shop for 10 years. Last year, Tyler’s wages were $20,000. Lately, Tyler has been unhappy with the shop’s owner. Convinced that he could run an upholstery shop that did better work at a lower cost, Tyler decided to go into business for himself and opened CLASSIC UPHOLSTERY SHOP.

To get the business going, Tyler decided to invest heavily in advertising. He spent $6,000 on advertising aimed at consumers and another $2,000 on advertising aimed at getting work from interior decorators and interior design stores. Tyler also purchased industrial sewing machines costing $4,000 and other tools and equipment costing $3,000. He estimated that the sewing machines can be used for about five years before maintenance costs will be too high and the machines will need to be replaced. The other tools and equipment are not as durable and will have to be replaced in three years.

At the end of the first year of business, Tyler had received $80,000 in cash from customers for upholstery work. Tyler was owed another $2,500 from customers who are not required to pay cash but are billed every 30 days.

A review of Tyler’s checkbook shows he paid the following expenses (in addition to those mentioned previously) during the first year of business:

Upholstery fabric $40,000
Other supplies 10,000
Wages—part-time assistant 9,500
Rent 4,800
Insurance (two-year policy) 3,200
Utilities 2,500
Miscellaneous expenses 1,700

Tyler’s utility bill for the last month of the year has not arrived. He estimated that the bill will be approximately $320.

Tyler keeps some stock of upholstery fabric in popular colors on hand for customers who do not want to wait for special-order fabric to arrive. At the end of the year, about $14,000 of the fabric purchased during the year was in his store stock. In addition, $2,300 in supplies had not been used.

HOW MUCH PROFIT DID TYLER MAKE IN HIS FIRST YEAR OF BUSINESS? DO YOU THINK IT WAS A GOOD IDEA TO OPEN THE UPHOLSTERY SHOP, OR WOULD TYLER BE BETTER OFF WITH HIS OLD JOB?

Explanation / Answer

Add cash and Accts. Rec. to get total revenues.Subtract expenses from this. Epenses are: Advertising One year's depreciation for the sewing machines and tools. Cost of Goods Sold (Fabric cost minus fabric stock on hand) Supplies (Supplies cost minus supplies stock on hand) Wages Rent Insurance (for 1 year only) Utilities (make sure you add the bill for the last month) Misc. Expenses Once you subtract expenses from revenues, you have Net Income or profit. If the net income is close to what Tyler made in his previous job, it was probably a good idea since the business should grow in the future. What was not included in this problem is the employer taxes that Tyler would have to pay on the employee's wages and the self-employment tax that Tyler would have to pay for himself. This should also go into the decision if this was a good idea or not.

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