Your Uncle Bob has worked in an upholstery shop for ten years. Last year, Uncle

Question

Your Uncle Bob has worked in an upholstery shop for ten years. Last year, Uncle Bob’s wages were

$ 30,000. Lately, however, Bob has been unhappy with his employer. Convinced that he could run an

upholstery shop that did better work at a lower cost, Bob decides to go into business for himself.

Withdrawing $ 7,000 cash from his personal savings account, Bob opens BOB’S UPHOLSTERY SHOP.

Primarily for liability purposes, Bob has decided to incorporate the business. 7,000 shares of stock, at $1

par value, are issued to Bob. His lawyers accept 500 shares of stock in exchange for the value of their

legal advice during the start-up phase. These legal fees would be considered Organization Costs and are

amortized over 5 years.

To get the business going, Bob purchases several industrial sewing machines costing $ 4,000. Bob also

needs other tools and equipment costing $ 3,000. Not wanting to completely deplete his cash balance, he

applies for, and receives, a $ 2,500, 3-year loan from a local bank.

Bob’s checkbook shows various increases and decreases over the twelve months ending December 31,

2008:

Bob billed his customers $ 160,000. All, but $ 10,000 has been received in cash.

Bob wrote checks for the following purchases:

Upholstery Fabric $ 80,000

Supplies $ 20,000

Wages for part-time help $ 9,500

Rent $ 4,800

Insurance (2-year policy) $ 3,200

Utilities $ 2,500

Your Uncle Bob has just presented a rough draft of his Company’s financial statements to you, knowing

that you are presently enjoying the rigors of an accounting course. You astutely ask him a couple of

questions and receive the following responses:

1. Do you have any unpaid invoices on your desk? Bob replies: “Yes, a $ 300 utility bill and

one for $ 10,000 for fabric I received a week ago.”

2. Did you make any loan payments this year? Bob answers: “I paid a total of $ 1,250, which

included $ 250 for interest.”

3. Do you have an inventory of fabric on hand as of December 31, 2008? “Yes, $ 5,000 and I

also have $ 550 of supplies on hand.”

4. How long do you expect to use your sewing machines and the other tools and equipment?

“The sewing machines should last 5 years and the other stuff about 3 years.

Update your previously prepared Balance Sheet and prepare an Income Statement to reflect the data

from Bob’s checkbook and his answers to your questions. (3 points)

4. Is Bob’s financial condition better, worse, or the same as it was before he started the business?

(.5 point)

5. How can Bob and his lawyers/shareholders get cash out of the business? How will this affect the

financial statements? (.5 point)

What business changes would you recommend for Uncle Bob for the next year? In general, how

would these affect the financial statements? (1 point)

2. Prepare the second year’s Income Statement for BOB’S UPHOLSTERY SHOP next to the 2008

Income Statement. Incorporate the following changes over 2008: (2 points)

• Fees earned increased 20% over the previous year.

• Bob has noticed that he has been left holding a “rubber” check after having

already released his finished product to the customer. He has been unable to

recover about 1% of his total sales from this situation and expects that percentage

to unfortunately continue in the future as well.

• Bob began running advertising in the Huntington Herald Press during the year.

Ads cost $ 250 per month.

• Bob adds himself to the payroll at $ 35,000.

• Part-time wages increase to $ 12,000 as business grows.

• Payroll tax expense is $ 4,500.

• Rent expense jumped to $ 5,000 and utilities increased 5%.

• Bob purchased a new tool, costing $ 1,000. It has a life of four years.

• Bob’s new tool allows him to work more efficiently. He used about 5% less

fabric and supplies (due to less waste) than he did last year.

• Interest paid this year was $ 150.

• Bob’s Upholstery is in the 15% corporate tax bracket.

3. How would you compare the results of operations of the two years? (1 point)

Explanation / Answer

Income statement

Particulars:::::::::::::::::::::::::::::::::::::::::::::::::Amount

Sales::::::::::::::::::::::::::::::::::::::::::::::::::::::::$ 160,000

Less:

Wages:::::::::::::::::::::::::::::::::::::::::::::::::::::$ 9,500

Rent:::::::::::::::::::::::::::::::::::::::::::::::::::::::: $ 4,800

Insurance ::::::::::::::::::::::::::::::::::::::::::::::: $ 1,600

Utilities::::::::::::::::::::::::::::::::::::::::::::::::::: $ 2,500

Utilities expense::::::::::::::::::::::::::::::::::::::::::$300

Interest::::::::::::::::::::::::::::::::::::::::::::::::::::::$ 250

Depreciation:::::::::::::::::::::::::::::::::::::::::::::::$1,800

____________________________________________

Net Income::::::::::::::::::::::::::::::::::::::::::::::::$139,250

Explanation:

Sewing machine 4,000 /5=$800

tools and equipment costing $ 3,000/3=$1,000

Balance Sheet

Current Assets::::::::::::::::::::::::::::::::::::Amount

Cash:::::::::::::::::::::::::::::::::::::::::::::::::::$10,000

Accounts Receivable::::::::::::::::::::::::::$150,000

Supplies on hand::::::::::::::::::::::::::::::::::::: $ 550

Inventory::::::::::::::::::::::::::::::::::::::::::::::::::$5,000

Prepaid Insurance:::::::::::::::::::::::::::::::::::$1,600

__________________________________________

current Assets::::::::::::::::::::::::::::::::::::::::::$167,150

Long term assets

Sewing machine::::::::::::::::::::::::::::::::::::::$ 4,000

Less:

Accumulated Depreciation:::::::::::::::::::::::::$800

Tools and equipment costing:::::::::::::::::: $ 3,000

Less:

Accumulated Depreciation::::::::::::::::::::::::$1,000

_________________________________________

LOng term assets:::::::::::::::::::::::::::::::::::::::$5,200

Other Assets:

Organization Cost::::::::::::::::::::::::::::::::::::::::::$500:

Less:

Amortization::::::::::::::::::::::::::::::::::::::::::::::::::$100(500/5=100

__________________________________________________

Total other assets:::::::::::::::::::::::::::::::::::::::::::$400

Total assets:::::::::::::::::::::::::::::::::::::::::::::::::::::::$172,750

Current liabilities:

Supplies::::::::::::::::::::::::::::::::::::::::::: $ 20,000

Fabric unbilled(accured):::::::::::::::::::$ 10,000

Loan payment:::::::::::::::::::::::::::::::::::$1,000

Long term liabilities:

Loan:::::::::::::::::::::::::::::::::::::::::::::::::$2,500

_______________________________________

Total liabilties:::::::::::::::::::::::::::::::::::::::$33,500

__________________________________________

ADD

Stock holder equity

Shares:::::::::::::::::::::::::::::::::::::::::::::::::::::::$7,000

Add

Net income::::::::::::::::::::::::::::::::::::::::::::::$139,250

____________________________________________________

Liabilities and Stock holder equity::::::::::$179,750

_______________________________________________________

4)no, bob financial condition is so good, but he is suffering from not receiving cash problem

5)Once, billed due date is expired make the penalty who does not pay the bill on date , so he can collected the cash.

After some time also he does not receive the cash he should ready to face severe loss. This loss will change the financial statement postivie to negative statementss.

Business changes has not to do sales for billed change to 50% cash and 50% billed, And sold out his share in trade.

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