Analyzing a Student's Business and Preparing an Income Statement and a Statement of Financial Position (P1-2)

Upon graduation from high school, John Abel immediately accepted a job as an electrician's assistant for a large local electrical repair company. After three years of hard work, John received an electrician's licence and decided to start his own business. He had saved \(\$ 12,000\), which he invested in the business. His lawyer had advised him to start as a corporation. First, he transferred this amount from his savings account to a business bank account for Abel Electric Repair Company Incorporated and was issued shares. He then purchased a used panel truck for \(\$ 9,000\) cash and second-hand tools for \(\$ 1,500\); rented space in a small building; inserted an ad in the local paper; and opened the doors on October 1, 2011. Immediately, John was very busy; after one month, he employed an assistant.

Although John knew practically nothing about the financial side of the business, he realized that a number of reports were required and that costs and collections had to be controlled carefully. At December 31, 2011, prompted in part by concern about his income tax situation, John recognized the need for financial statements. His wife, Jane, developed some financial statements for the business. On December 31, 2011, with the help of a friend, she gathered the following data for the three months just ended. Bank account deposits of collections for electric repair services totalled \(\$ 32,000\). The following cheques had been written: electrician's assistant, \(\$ 8,500\); payroll taxes, \(\$ 175\); supplies purchased and used on jobs, \(\$ 9,500\); oil, gas, and maintenance on truck, \(\$ 1,200\); insurance, \(\$ 700\); rent, \(\$ 500\); utilities and telephone, \(\$ 825\); and miscellaneous expenses (including advertising), \(\$ 600\). Also, uncollected invoices to customers for electric repair services amounted to \(\$ 3,000\). The \(\$ 200\) rent for December had not been paid. The average income tax rate is 30 percent. John estimated the cost of using the truck and tools (depreciation) during the three months to be \(\$ 1,200\).

Required:

1. Prepare a quarterly income statement for Abel Electric Repair Company Incorporated for the three months of October through December 2011. Use the following main captions: Revenue from services, Expenses, Profit before income taxes, and Profit.

2. Prepare a statement of financial position for Abel Electric Repair Company Incorporated as at December 31, 2011.

3. Do you think that John may have a need for one or more additional financial reports for 2011 and thereafter? Explain.