Upon graduation from high school, William Nitter accepted a job as a plumber’s assistant for a large local plumbing company. After three years of hard work, William received a plumbing licence and decided to start his own business. He had saved $ 24,000, which he invested in the business. His lawyer had advised him to start as a corporation. First, he transferred the $ 24,000 from his savings account to a business bank account for William’s Plumbing Services Inc. and was issued shares. He then purchased a used panel truck for $ 18,000 cash and second- hand tools for $ 3,000, rented space in a small building, inserted an advertisement in the local paper, and opened his business on July 1, 2014. Immediately, William was very busy; after one month, he employed an assistant.
Although William knew practically nothing about the financial side of the business, he realized that a number of reports were required and that expenses and collections from clients had to be controlled carefully. At December 31, 2014, prompted in part by concern about his income tax situation, William recognized the need for financial statements. His wife, Jennifer, developed some financial statements for the business. On December 31, 2014, with the help of a friend, she gathered the following data for the six months just ended. Bank account deposits of collections for plumbing services totalled $ 64,000. The following cheques had been written: plumber’s assistant, $ 17,000; payroll taxes, $ 750; oil, gas, and maintenance for the truck, $ 2,400; rent, $ 2,500; supplies purchased and used on jobs, $ 17,100; utilities and telephone, $ 1,850; insurance, $ 700 for the past six months; and miscellaneous expenses (including advertising), $ 900. Also, uncollected invoices to customers for plumbing services amounted to $ 6,000. The $ 500 rent for December had not been paid. William estimated the cost of using the truck and tools (depreciation) during the three months to be $ 2,400. The average income tax rate for income from his business is 30 percent.
1. Prepare a statement of earnings for William’s Plumbing Services Inc. for the six months of July through December 2014. Use the following main captions: Revenue from services, Expenses, Earnings before income taxes, and Net earnings.
2. Prepare a statement of financial position for William’s Plumbing Services Inc. as at December 31, 2014.
3. Do you think that William may have a need for one or more additional financial reports for 2014 and thereafter? Explain.