Question

Question:

Based on the information below info, prepare an income statement for 2018, statement of retained earnings for 2018, and a balance sheet on 12/31/2018 that makes sense based on the provided info. (Note: you can add additional info if desired. The below info is just the minimum required.)

Background:

Last year, you set up your own business in the merchandising sector. You lease a space of 6,000 square feet to open a luxury watch shop. The following is the only known information regarding the business.

         1. Specific Market Sector: Merchandising

         2. Location: Scranton, Pa

         3. Business Model: Buying/selling luxury watches

        4. Investment by owner: $1,000,000

         5. Employ 1 shop manager, 2 accountants who also keep the merchandise, 1 security officer, 8 full time sales associates.

Requirements:

         1. Business costs/expenses should have at least the following: cost of merchandise sold, rent expense, salary, utilities expense, advertising expense, interest expenses, and miscellaneous expenses.

         2. Capital Structure: must have both the $1,000,000 investment by owner and a bank loan.

Answer 1

I. Income Statement

For the year ended 12/31/2018

	$
Total Sales	3250000
Less: Cost of merchandise sold	2500000
Gross Income(A)	750000
Expenses:
Rent Expense ( $6000*12 months)	72000
Salary:
Shop manager	48000
Accountant ( 2 x 36,000)	72000
Security officer	36000
Full time sales associates (8 x 24,000)	192000
Utilities expense	10000
Advertising expense	10000
Interest expense ($2,000,000*6%)	120000
Miscellaneous expense	5000
Total Expenses(B)	565000
Net income (A-B)	185000

II. Statement of retained earnings

For the year ended December 31, 2018

	$
Retained earnings as on 01/01/2018	0
Add: Current year earnings	185000
Total Retained earnings	185000

III. Balance sheet

For the year ended December 31,2018

Assets	$	Liabilities & Capital	$
Cash	2035000	Bank loan	2000000
Stock	500000	Capital	1000000
Receivables	650000	Retained earnings	185000
TOTAL	3185000	TOTAL	3185000

Working notes:

1. Inventories at the end of the year = $ 3,000,000 - $ 2,500,000 = $ 500,000

2. Cash balance at the end of the year = Total cash collection from sales(80% of total sales) - Expenses = $ 2,600,000 - $ 565,000 =$ 2,035,000

3. Receivables at the end of the year is 20 % of total sales. i.e. $3,250,000 * 20%= $ 650,000

Assumptions:

1. Bank loan is $ 2,000,000                (for best capital structure, Debt/equity ratio is 2:1)
2. Bank loan @ 6% Per year.
3. Rent per square feet is $ 1 per months.
4. Shop manager’s salary - $ 48,000 Per year,

Accountant’s Salary - $ 36,000 per year

Security officer’s salary - $ 36,000 per year

Full time sales associate’s salary - $ 24,000 per year

5. Advertising expense - $ 10,000 per year
6. Miscellaneous expenses - $ 5,000 per year
7. Utilities expense - $ 10,000 per year
8. Gross income is 25% on total net assets
9. Total cash invested on Stock (Luxury watches) i.e. Investment in stock is $ 3,000,000 out this sales is $ 2,500,000
10. 80% is Cash sales and 20 % is credit sales
11. Gross income is 30% on Total cost of merchandise sold.