It was June 1, 2012. Peter Hunter had just finished his first hectic year as owner and

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It was June 1, 2012. Peter Hunter had just finished his first hectic year as owner and operator of his clothing store “Young Man Inc.” and was anxious to know how the company had performed financially and to assess that performance.

On May 17, 2011, Hunter graduated with a university honours degree in business from the Ivey Business School (Ivey), London, Ontario, in front of his parents, family and friends, together with his classmates and their families. Several weeks later, on June 1, 2011, in the Centretown Shopping Centre in Kitchener- Waterloo, his home town, he opened a clothing store, called “Young Man Inc.” (Young Man), focusing on young men’s tastes, styles and specific needs. Hunter had an almost addictive need to get into retailing that started during his high school years with a part-time job that he absolutely loved. He had studied retail at Ivey and had planned the store’s grand opening for months. He spent much of his last term at Ivey working on projects involving a retail men’s clothing chain operating in several Canadian cities for his courses in advertising, operations, general management and corporate finance. Hunter envisioned a chain of Young Man stores as the next step in his plan.

Now, one year later, Hunter was excited to see the results. He had kept track of sales numbers and cash balances on a daily basis, but he did not have time to prepare and review interim financial statements. The business was highly seasonal with almost 40 per cent of annual sales occurring from November 15 to December 24 (the Christmas season) and another 35 per cent occurring in May and June (the months of university and high school graduations and in preparation for the first full-time job).

Start-Up Funding

Hunter had invested $50,000, a combination of his savings and money borrowed from his parents, in 50 shares of common stock on June 1, 2011. In addition, he had set up a five-year bank loan for $50,000, co- signed by his uncle, which was deposited in the account on June 1, 2011. The loan interest rate was prime, 3 per cent over the past year, plus 1 per cent, with interest paid annually on June 1 of each year. Interest

was calculated on the loan’s outstanding balance at the beginning of the year. On May 31, 2012, Hunter repaid $20,000 of the bank loan.

Cash Disbursements

Young Man’s cash disbursements during the year were as follows:

Accounts payable to merchandise suppliers	$498,790
Transportation costs on purchases	10,250
Furniture and fixtures	50,000
Freight on furniture	4,600
Website	3,000
Rent	36,000
Wages and salaries	110,400
Insurance	2,400
Office supplies	4,560
Advertising	5,800
Computer and software	3,870
Cash register	2,700
Utilities, Internet, postage, etc.	4,500
Bank loan principal repayment	20,000

Location

Young Man was located in a relatively new shopping mall and leased 100 square metres at an annual cost of $360 per square metre. The lease was for two years from June 1, 2011 to May 31, 2013. Rent was paid on the first of every month.

Sales

Gross sales for the first fiscal year totalled $680,141, of which $43,141 had been for cash while the remaining sales were on credit. Credit card charges averaged 3 per cent of total credit sales. Total sales returns amounted to $28,560. All customers, regardless of how they paid for their purchases, were given credit vouchers (not cash) for the amount of a return that could be used at some point in the future. At the end of May 2012, there were $2,560 worth of outstanding credit vouchers. The ending balance of accounts receivable from customers was $2,420.

Equipment Purchases

The furniture and fixtures (included chairs and tables, light fixtures and clothing racks) were purchased in May 2011 to arrive in time for the store opening. The freight on these items, shipped FOB Winnipeg, amounted to $4,600. These items were expected to have a five-year life after which time Young Man anticipated either a move to larger quarters or a renovation to the existing facility.

For $3,870, Hunter purchased a computer installed with specific software for retail operations. The effective life of the computer was estimated at three years. The cash register system was integrated into the computer system. Its cost was an additional $2,700 with an estimated life of three years.

Website Development

One of Hunter’s friends from Ivey set up a website incorporating all the latest features used on the best retail websites, but he charged Hunter a fraction of what the market charged for website development. Hunter anticipated the website would not need a major overhaul for two years.

Operations

The store was open seven days a week, 10:00 a.m. to 9:00 p.m. Monday to Saturday and 11:00 a.m. to 6:00

p.m. on Sunday. Because of the extensive hours of operations and Hunter’s plans to be away from the store frequently as part of the purchasing activity, on June 1, 2011, he hired a manager, a full-time salesperson and several part-time sales staff. Their wages were:

Manager – who also did tailoring $3,000 per month

Salesman full-time $2,500 per month

Part-time sales staff (total) $700 per month

In addition, Hunter paid himself an annual salary of $36,000. All salaries and wages were paid on the last day of the month.

Other Information

On July 1, 2011, Hunter purchased a comprehensive insurance policy for $2,400 for a full year’s coverage of operations.

Earlier in the year, he had contracted for advertising with the local daily newspaper to run special promotional ads three times a year (November 15, December 10 and April 22) as well as a regular monthly ad that concluded with the May 15 issue, at a cost of $5,800. Payment for all advertising was required prior to the advertisement’s publication date.

The office supplies (including postage) and utilities and Internet bills were paid the month following the receipt of these bills. As of May 31, 2012, a bill for $750 for office supplies and a bill for $500 for utilities and Internet for the month of May were outstanding.

Purchases of all clothing and sundries for the fiscal year ended May 31, 2012 amounted to $599,500. All purchases were made on credit terms of 60 days. Purchases included in this total for April and May were

$56,700 and $39,450 respectively. Young Man’s suppliers shipped purchased goods FOB shipping point (i.e., their plant); as a result, Young Man paid $10,250 in transportation costs when the goods were delivered. In early January 2012, Hunter returned $4,560 worth of goods. The suppliers agreed to bear the cost of the return transportation. Since Hunter had not yet paid for the goods, the suppliers reduced Hunter’s outstanding balance.

After closing on May 31, 2012, Hunter and the manager counted the entire inventory on hand and costed it at $124,500. The inventory of office supplies was also counted and totalled $1,470.

Young Man was subject to a corporate tax rate of 20 per cent. Income taxes were to be paid six months after Young Man’s fiscal year end.

SUMMARY

Hunter wanted to see in detail how his business had performed and to assess that performance. He had many exciting ideas for Young Man’s future. He was anxious to know the financial results so that he could, hopefully, go ahead with many of these ideas.

Prepare a transactions analysis for the economic events

• Add transactions for any necessary adjusting entries(hint: among other things, you should have four adjusting entries to record the useful life of various long-lived assets)

• Prepare an income statementand balance sheet