Tyler Smith has worked in an upholstery shop for 10 years. Tyler's wages were $20,000. Lately, Tyler has 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. He invested $2,000 of his own money and borrowed $13,000 from the bank at 8% interest. Interest is payable at the end of each year and the principal is paid in full in one lump sum at the end of 5 years.
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 5 years before maintenance costs would be too high and the machines would need to be replaced. The other tools and equipment are not as durable and would have to be replaced in 3 years. The costs associated with the sewing machines and the tools and equipment are depreciated over time based on their estimated useful lives, using the straight line method.
At the end of the first year of business, Tyler had received $80,000 in cash from customers for upholstery work performed. Tyler was owed another $2,500 from customers who are not required to pay cash, but are billed every 30 days for work performed. In addition, Tyler had received $3,500 deposit from a customer for a job to be completed in the future.
A review of Tyler's checkbook shows he paid for the following items (in addition to those mentioned previously) during the first year of business:
- Upholstery fabric $40,000
- Other supplies 10,000
- Wages-part-time assistant 9,500
- Rent 4,800
- Insurance (two-year policy) 3,200
- Utilities 2,500
- Miscellaneous expenses 1,700
Tyler's utility bill for the last month of the year has not arrived. He estimated 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 of supplies purchased during the year had not been used..
Required:
1- Prepare an income statement, statement of retained earnings , non-classified, in order of liquidity, balance sheet , and statement of cash flows (indirect method.) for Tyler's first year in business .
2-Do you think it was a good idea to open the upholstery shop? Why or why not? What does the decision depend on?