1 Case study To begin with we would like to provide some background information about the case under consideration.

Alice Johnson was raised on a farm in Western Queensland. While in high school, she was an active member of the local rural youth club and raised several prize animals that sold at auction in state and local shows. She saved her earnings and by the time she finished high school, Alice had nearly $7,000 in a savings account. She was undecided whether to go onto tertiary education or use her savings in a business venture. In the end, she decided to operate a pet grooming shop. However, she wanted to try and decided to use summer months as a trial period. During the month of October 2010 Alice located a small building that she could rent for $200 per month on a short term basis. After transferring $5,000 from her savings account to a business cheque account in the name of Alices Pet Grooming Service, she wrote cheques for rent (November) and the purchase of grooming equipment and grooming supplies. Although Alice would not keep a full set of accounting records, she decided to deposit all receipts of revenue from services performed into the cheque account and to make all payments by cheque. Alice also kept a daily work book in which she recorded all services performed for customers. On 1st November, Alice opened her shop to the public. During the first 3 months she was unusually busy. Early in February, she needed to make a decision on whether to continue operating her business or enrol into university studies. To aid her in making this important decision, Alice reviewed her cheque account and daily work book to determine how well she had done. The review disclosed the following. 1. Total cash deposited in the account (including the initial $5,000) was $8,920. 2. The daily work book showed that on 31 January 2011 customers owed her $800 for services performed (accounts receivable) which she expected to collect in February.

2 3. Cheques were written for a. Rent payments totalling $600 for the months of November to January. b. The purchase of grooming equipment $1,500 (the equipment is treated as an expense, not an asset), (the equipment actually cost $2,000 and Alice still owed the supplier $500 on the purchase expected to be paid in February) c. Grooming supplies, $960. Alice conducted a stock take of grooming supplies and $260 in value was on hand at 31st January 2011. d. The payment of electricity bills for the months of November and December $522 (for both months). She had just received her bill for January for $279 but had not yet paid it. e. Advertising paid by cheque $216. f. Withdrawals made by Alice (known as drawings) to pay for personal expenses, $1,300 First of all, we would like to prepare an income statement for this business. This income statement is provided in the table below. We would like to add that we did not have a goal to follow all the accounting and financial standards, while preparing the income statement. Our goal was simply to analyze financial performance of the business. All the amounts are provided in the U.S. dollars. Sales Costs of production Advertisement cost Rent -Total costs Net income 4 720 3 261 216 600 4 077 643

3 As we can see, Alice has managed to get a positive financial result at the end of period. It means that the business has created some profits. However, we did not account for the personal expenses. If had done it the final financial result would have been negative. On the other had, it is difficult to account for the personal expenses in business. Now it is time to prepare a balance sheet. A formal definition of the term balance sheet can be the following. Balance sheet is a financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders (Balance Sheet Definition). The balance sheet for the business under consideration is provided in the following table. Current assets: -Cash and equivalents -Accounts receivable Total current assets: Total assets: Current liabilities: -Accounts payable Total current liabilities: Equity Total equity: 4 720 4 720 5 000 5 000 8 920 800 9 720 9 720

After analysis of the companys financial statements, we have to answer whether business should go on or not. We believe that it should. Despite the fact, that the overall

4 result is probably negative, business has already created the basis of clients, established some equipment etc. It was only a trial period and it was quite successful we must say. The next case is the following. Pam Jackson operates the Jackson Dance Studio. On 1st June of the current year her balance sheet contained the following information. Current Assets: Cash Acc Receivable Prepaid insurance Inventory Total current Assets Current Liabilities: Notes payable Accounts payable Total Current Liabilities Net Assets Owners equity: Capital P Jackson $9,730 $2,330 $9,730 $2,000 $330 $12,060 $7,800 $3,500 $300 $460

Total Owners equity $9,730

First of all, we would like to prepare the income statement and the balance sheet for this business. However, these financial statements will be prepared for the end of Month, taking into account all the transactions, provided in the case. The balance sheet is provided in the table below.

5 Current Assets: Cash Acc Receivable Prepaid insurance Inventory Total current Assets Current Liabilities: Notes payable Accounts payable Total Current Liabilities Net Assets Owners equity: Capital P Jackson $16.240 $2,780 $16.240 $2,000 $780 $19.020 $10.810 $7.300 $300 $610

Total Owners equity $16.240

The analytical income statement for the business under consideration is provided in the following table. Sales Expenses Net revenues $8.900 $2.290 $6.610

Finally, we have to prepare the T-accounts, taking into consideration all the transactions.

6 Assets Cash 5 100 Accounts receivable 3 800 Prepaid insurance 50 Inventory 150 2 590

Liabilities Note payable 500 Accounts payable

Equity CR Capital

Drawings 400

Revenue CR Revenue fees

7 3 800 Revenue performances 2 500

Expenses DR Rent expenses 1 140 Suuplie expenses 230 Advertising expense

Misc expense 40 Electricity expense 160 Insurance expense 50

8 References Balance Sheet Definition. Available from: <http://www.investopedia.com/terms/b/balancesheet.asp>. [10 May 2012]