Question

Julie operates a small aerobics studio, Yumba, Inc. She started her business on 01/01/17. Below are a list of transactions and financial events that took place during the fiscal year-end 2017. She has been authorized by the state of Oregon to sell up to 500 shares of common stock ($1 par value). Please prepare an income statement on the accrual basis and a statement of cash flows.

Yumba issues 250 shares to Julie for $75,000.

Julie takes out a 5 year (annual payments) loan of $90,000 on January 1^st. She will make her first payment on December 31, 2017. Interest rate of 8%.

Julie buys a building and equipment for her studio totaling $60,000 on January 1^st.

During the year, Julie earns $135,000 of revenue, of which $110,000 is received in 2017 and the remainder will be received in 2018.

Julie incurs $35,000 of salaries to her employees. Julie pays out $22,000 in 2017 and will pay out the remaining amount at the beginning of 2018.

Julie incurs $26,000 in utility costs. She pays $24,000 of these costs in 2017 and will pay out the remaining amount in 2018.

Julie incurs $5,000 to advertise in the local newspaper. She pays all of these expenses in 2017.

On December 31^st:

Julie pays the first payment on her loan (including interest).

Julie depreciates the building and equipment over 10 years, straight-line (no salvage value).

Julie pays herself a dividend of $5,000.

Answer 1

Step 1 : Income statement of Yumba, Inc. on the accrual basis is shown as follows:-

  Yumba Inc.

Income Statement for the year ended December 31, 2017 (Amt. in $)

Total Revenue (A)	135,000
Expenses:
Salaries to employees	35,000
Utilities cost	26,000
Advertising expense	5,000
Interest on loan ($90,000*8%)	7,200
Depreciation on Building and Equipment ($60,000/10 years)	6,000
Total Expenses (B)	79,200
Net Income (A-B)	55,800

Working Notes:-

1) In accrual basis of accounting, the revenue and expenses accrued during the year are considered and net income for the year is calculated.

2) Interest at the rate of 8% is due and paid on amount of the outstanding loan of $90,000. The interest is $7,200 (i.e. $90,000*8%).

3) Depreciation on building and equipment is calculated by dividing the purchase value of building and equipment by 10 as there is no salvage value and straight value method is used. Thus depreciation on building and equipment is $6,000 (i.e. $60,000/10 years).

Step 2 : Statement of cash flows of Yumba Inc. for the year ended December 31, 2017 is shown as follows:-

  Yumba Inc.

Statement of Cash Flows (Amount in $)

Cash Flows from Operating activities
Revenue received	110,000
Salaries paid to employees	(22,000)
Utility cost paid	(24,000)
Advertising cost paid	(5,000)
Net cash from operating activities (A)	59,000
Cash Flows from Investing activities
Building and Equipment purchased	(60,000)
Net cash used in investing activities (B)	(60,000)
Cash Flows from Financing activities
Loan taken	90,000
Payment of loan ($90,000/5 years)	(18,000)
Interest on loan paid	(7,200)
Issue of shares to Julie	75,000
Dividend paid to Julie	(5,000)
Net cash from financing activities (C)	134,800
Net Increase/(decrease) in cash and cash equivalents (A+B+C)	133,800
Add: Opening balance of cash and cash equivalents	0
Closing balance of cash and cash equivalents	133,800

1) Payment of loan on December 31, 2017 is of $18,000(i.e. $90,000/5 years) as the amount of loan of $90,000 is to be repaid in 5 years.

2) As the business is started on January 1, 2017, the opening balance of cash and cash equivalents is zero.