Financial Statement of a Business

Introduction This report intends to evaluate the financial statements prepared for the inaugural month of operations of the service business. These financial statements play a crucial role in understanding the company’s financial standing and performance, guiding decision-making processes and future planning efforts.
Process The financial statements were crafted by meticulously recording and analyzing business transactions, followed by the creation of the income statement, statement of owner’s equity, and balance sheet. Each statement conveys essential details about the company’s revenues, expenses, changes in equity, as well as its assets and liabilities, offering valuable insights into its financial status.
Financial Statement Analysis Based on the financial statements, it is apparent that the company is operating profitably, as indicated by a positive net income showing revenue surpassing expenses. However, an examination of liquidity reveals a moderate current ratio, suggesting the need for more efficient management of current assets and liabilities to meet short-term obligations effectively.
Internal Controls To safeguard company assets and ensure data accuracy, it is advisable to implement internal controls such as segregating duties, conducting regular financial audits, and maintaining thorough transaction documentation. Furthermore, establishing controls to support the integration of merchandise inventory and the acquisition of long-term assets will facilitate smooth business expansion.
Looking to the Future Regarding the acquisition of long-term assets, the company should carefully consider accounting methods for depreciation, including straight-line and accelerated depreciation, to accurately represent asset value over time. With the introduction of merchandise inventory, the company must make informed decisions on inventory costing methods like FIFO, LIFO, or average costing, depending on inventory turnover rates and cost fluctuations. Proactively addressing these accounting considerations will enable informed decision-making and support the company’s growth strategies in the future.

For the first month of operations, the following transactions need to be recorded using the provided chart of accounts:

  1. June 1: Owner contributed $50,000 in cash to the business. (Journal Entry: Debit Cash $50,000, Credit Owner’s Capital $50,000)
  2. June 1: Owner purchased a company vehicle for $15,000. (Journal Entry: Debit Vehicle $15,000, Credit Cash $15,000)
  3. June 3: Owner took out a small business loan for $25,000. (Journal Entry: Debit Cash $25,000, Credit Notes Payable $25,000)
  4. June 5: Owner paid rent for June and prepaid office rent for July through December at $1,195 per month. (Journal Entry: Debit Prepaid Rent $7,170, Credit Cash $7,170)
  5. June 5: Owner paid business license fees of $250 to the county. (Journal Entry: Debit Business License Expense $250, Credit Cash $250)
  6. June 5: Owner ordered office supplies on account for $750. (Journal Entry: Debit Office Supplies $750, Credit Accounts Payable $750)
  7. June 6: Owner performed services for a client on account for $1,000. (Journal Entry: Debit Accounts Receivable $1,000, Credit Service Revenue $1,000)
  8. June 9: Owner provided services for a client for $1,500. The client paid $750 at the time of service. (Journal Entry: Debit Cash $750, Accounts Receivable $750, Credit Service Revenue $1,500)
  9. June 10: Owner paid $250 for advertising costs to the local paper. (Journal Entry: Debit Advertising Expense $250, Credit Cash $250)
  10. June 15: Owner recorded wages due to the part-time employee for $325. (Journal Entry: Debit Wages Expense $325, Credit Wages Payable $325)
  11. June 15: Owner prepaid business insurance for July through December at $125 per month. (Journal Entry: Debit Prepaid Insurance $750, Credit Cash $750)
  12. June 20: Owner paid wages due to part-time employee. (Journal Entry: Debit Wages Payable $325, Credit Cash $325)
  13. June 21: Owner paid $210 for plumbing repairs in the office. (Journal Entry: Debit Repairs and Maintenance $210, Credit Cash $210)
  14. June 22: Owner withdrew $1,000 cash for personal use. (Journal Entry: Debit Owner Draws $1,000, Credit Cash $1,000)
  15. June 23: Customer paid the balance due from the June 6 service of $1,000. (Journal Entry: Debit Cash $1,000, Credit Accounts Receivable $1,000)
  16. June 25: Owner provided services to a client for $800, which was paid at the time of service. (Journal Entry: Debit Cash $800, Credit Service Revenue $800)
  17. June 28: Owner paid the balance due for the office supplies purchase on June 5. (Journal Entry: Debit Accounts Payable $750, Credit Cash $750)
  18. June 29: Owner performed services for a client on account for $2,225. (Journal Entry: Debit Accounts Receivable $2,225, Credit Service Revenue $2,225)
  19. June 30: Owner received a telephone bill for June for $155. (Journal Entry: Debit Telephone Expense $155, Credit Accounts Payable $155)
  20. June 30: Last day of pay period; owner owes part-time worker $325 for the June 16 through June 30 pay period. (Journal Entry: Debit Wages Expense $325, Credit Cash $325)
  21. June 30: Record depreciation on the vehicle for $250. (Journal Entry: Debit Depreciation Expense $250, Credit Accumulated Depreciation $250)
    These transactions should be recorded in the appropriate journals and then posted to the ledger accounts. After posting, an unadjusted trial balance should be prepared, followed by adjusting entries, an adjusted trial balance, and finally, the preparation of financial statements including the income statement, statement of owner’s equity, and balance sheet. Closing entries should then be made to close temporary accounts and prepare for the next accounting period.

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