Your brother started a small business, GameZ, that produces a software game he developed. It is his first year in business, and he kept detailed records of the business. However, his business records consist primarily of entries in his checkbook plus information using a simple method of adding and subtracting cash on a spreadsheet. Your brother has asked your advice about the kind of financial statements that would be helpful to his business. He would like you to prepare information for two different uses.
First, he needs a small bank loan to provide cash during the low season at the end of summer. Most of his sales are made in December. He has a steady, low volume of sales most of the rest of the year, but sales drop to near zero in August when school is beginning for many children. He wants to approach his bank about a line of credit upon which he could draw in August and then pay off in January. In addition, he would like to be able to analyze information from his operations to make decisions about whether to develop a new game, what price to set, and how much he could devote to advertising. He also recently hired an assistant to whom he assigned a great deal of responsibility for general operations. He would like to be able to monitor and reward her performance in some way. Write a memo to your brother in response to his request. Include the following aspects in your memo.
A. Outline his possible choices for income statement formats.
B. List the advantages and disadvantages of each format.
C. Recommend and explain which type of statement should be used for each of his desired purposes.