Tyler Smith had worked in an upholstery shop for 10 years. Last year, Tyler’s wages were $20,000. Lately, Tyler had 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, INC. He organized his business as a corporation and deposited $25,000 into a business bank account in exchange for shares of common stock.
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 supplies10,000
Wages—part-time assistant9,500
Rent4,800
Insurance (two-year policy)3,200
Utilities2,500
Miscellaneous expenses1,700
Tyler’s utility bill for the last month of the year has not arrived. He estimates 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 CLASSIC UPHOLSTERY SHOP, INC. MAKE IN ITS FIRST YEAR OF BUSINESS? PREPARE AN INCOME STATEMENT IN MICROSOFT EXCEL AND SHOW YOUR WORK FOR ANY CALCULATIONS
- DO YOU THINK IT WAS A GOOD IDEA FOR TYLER TO OPEN THE UPHOLSTERY SHOP, OR WOULD HE BE BETTER OFF WITH HIS OLD JOB? PROVIDE YOUR REASONS AS TO WHY
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