Accrual Accounting Problem

Tyler Smith has worked in an upholstery shop for 10 years. Last year, Tyler's wages were $20,000. Lately, Tyler has been unhappy with the shop's owner. Convinced that he could run an upholstery shop that did better work at a lower cost, Tyler decided to go into business for himself and opened CLASSIC UPHOLSTERY SHOP on January 1, 2016.

To get the business going, Tyler decided to invest heavily in advertising. He spent $6,000 on advertising aimed at consumers and another $2,000 on advertising aimed at getting work from interior decorators and interior design stores. Tyler also purchased industrial sewing machines costing $20,000 and other tools and equipment costing $6,000. He estimated that the sewing machines can be used for about 5 years before maintenance costs will be too high and the machines will need to be replaced. The other tools and equipment are not as durable and will have to be replaced in 3 years.

At the end of the first year of business, Tyler had received $80,000 in cash from customers for upholstery work. Tyler was owed another $5,000 from customers who are not required to pay cash but are billed every 30 days.

A review of Tyler's checkbook shows he paid the following expenses (in addition to those mentioned previously) during the first year of business:

Upholstery fabric $ 40,000

Other supplies 10,000

Wagespart-time assistant 10,000

Rent 6,500

Insurance (3-year policy) 9,000

Utilities 2,500

Miscellaneous expenses 1,500

Tyler's utility bill for the last month of the year has not arrived. He estimated that the bill will be approximately $500.

Tyler keeps some stock of upholstery fabric in popular colors on hand for customers who do not want to wait for special-order fabric to arrive. At the end of the year, about $14,000 of the fabric purchased during the year was in his store stock. In addition, $3,000 in supplies had not been used. Tyler pays $500 a month rent on the facility and has already paid one months rent for next year.

Required:

1. Prepare an informal income statement to determine how much profit Tyler made in his first year of business?

2. Do you think it was a good idea to open the upholstery shop or was Tyler better off at his old job? Explain.