Jay Ryan owns Jay's Skateboard Shop, which he opened on 1 April 20X4. At that time Jay invested \(\$ 20000\) cash into the business. With this money the shop immediately purchased shop equipment for \(\$ 8000\). Jay estimated that this equipment would last ten years and would have no value after that time. The shop also purchased \(\$ 6000\) of inventory for cash and paid \(\$ 1800\) for one year of shop rent in advance. During the year, the shop was open for business six days a week. Over the nine-month period in 20X4, Jay withdrew \(\$ 1000\) per month for his personal expenses. He used a periodic inventory system, employed one part-time helper, and paid the shop's bills by business cheque. For most of the year the shop made only cash sales and paid for purchases before the goods were shipped from the shop's supplier. However, near the end of the year the shop began to sell items on credit to a few 'responsible customers'. Jay kept a small notebook of the amounts of these credit sales. They totalled \(\$ 3000\) at the end of \(20 \mathrm{X} 4\), and none had been collected yet. Because the shop was such a good customer, its suppliers allowed the shop to purchase \(\$ 4000\) of inventory on credit near the end of \(20 \mathrm{X} 4\). The shop had not yet paid for these purchases at the end of 20X4. At the end of 20X4 Jay wanted to know how well the shop was doing, so he prepared the following 'income statement'.

Jay did not feel comfortable with this information and came to you, a small-business consultant, for help. He said, 'The shop shows net income of \(\$ 700\), but there is \(\$ 12700\) in the business' cheque account, so cash went down by \(\$ 7300\). I don't understand. I just 'took

inventory", and it amounts to \(\$ 5000\) (including the credit purchases), but the shop owes \(\$ 400\) of salary to my employee. I want to know how much the shop earned in \(20 \mathrm{X} 4\), what were its cash flows in 20X4 and where the shop stands financially at the end of 20X4. I also am interested in the return ratios on my investment in the business over the last nine months. Finally, I need a recommendation about my accounting system. Please prepare a report for me that answers these questions.'
Required:
Prepare for Jay a report that includes an income statement and a cash flow statement (using the direct method for operating cash flows) for the nine months ended 31 December 20X4, and a balance sheet on 31 December 20X4, for his shop. Include explanations for all amounts shown, as well as a discussion that answers Jay's questions and recommends an accounting system.

Transcribed Image Text:

Cash receipts: Cash sales Cash payments: Income Statement for 20X4 Salary to part-time help Cash purchases of Rent expense Utilities expense Withdrawals Net Income inventory $ 3200 20 000 1800 1300 9000 $36 000 (35 300) 700 $