3. Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he’d done that his balance sheet was as follows.

During the next month, his first month of business, he completed the following transactions. (All payments were made with checks out of the bank account.)
• Purchased $2,500 worth of inventory, paying $1,500 down and owing the vendor the remainder.
• Used $500 of the inventory in making product.
• Paid employees’ wages of $1,100 on the last day of the month.
• Sold all the product made in the first month on credit for $3,000.
• Paid rent of $1,200.

a. Construct a balance sheet for Fred’s business at the end of its first month.
(Hint: Fred’s business has only current assets, current liabilities, and an equity account. Calculate the ending balance in each of the current accounts from the information given. The ending equity account balance will be the difference between the current assets and liabilities at month end.)

b. Construct Fred’s income statement. (Hint: Fred’s revenue is the credit sale.
His costs/expenses consist of the inventory used in product sold plus the things other than inventory for which he wrote checks. Ignore taxes.)

c. Construct Fred’s statement of cash flows for the month. (Hint: Fred’s beginning balance sheet has only two accounts, cash and equity, each with a $5,000 balance.
All other accounts open with zero balances.)

d. Is Fred’s business profitable in an accounting sense? In a cash flow sense?
(Words only.)

e. Can the business fail while making a profit? How might that happen in the next month or so? (Words only.)

Transcribed Image Text:

Assets Liabilities and Equity Cash $5,000 Equity $5,000 Total $5,000 Total $5,000