Annika had worked for a lawn care service business until a few years ago, when she decided to start her own business selling soil testing kits to homeowners. Annika had saved $20,000 during the past five years to invest in her business.

To start her business, Annika spent $2,000 for gas and other supplies. Annika also spent $20,000 to purchase soil testing kits that will be placed in inventory. She calculated she needed at least $3,000 cash on hand to make ends meet before she received money from her first round of sales. Annikas family members are helping her as she starts the business, with her sister acting as a bookkeeper and her father letting her use the family garage for an office. She will not be charged rent for the first year of her business.

Annika purchased the following capital items to start the business:

a truck, which cost $45,000, which she estimates will last for five years. The truck

depreciates at a rate of 33% annually, and has an estimated salvage value of $12,000.

a storage tank for gasoline to be used for the truck, which cost $1,000. The storage tank

has a useful life of 7 years, after which its salvage value is $0. It depreciates a constant

value each year.

a computer and some other office equipment for a total of $4,000. The office equipment

has a useful life of 4 years and also has a salvage value of $0. The equipment depreciates a constant value each year.

Annika borrowed $15,000 from her father. The principal is to be repaid in 18 months. The interest rate is 4% annually. At the end of the first year, Annika will repay her father the interest for 12 months, but no principal. At the end of 18 months Annika will pay her father interest for 6 months, plus all principal owed on the loan. Annika borrowed the balance of what she needed from her local Scotiabank branch. The loan was to be repaid in five equal, annual principal payments, with interest at an annual rate of 5%.

During her first year in business Annika purchased 1,000 kits at $50.00/kit that were in addition to the $20,000 spent on kits to start the business. The freight on the kits was $5,000. At the end of the first year of the business she had $26,000 worth of kits in inventory. Her additional expenses that first year also included gas, oil, repairs, and tires for her work truck ($10,000) and the cost of her business phone ($600). Annika has a company credit card which she can use if she does not have enough cash on hand to cover expenses. The credit limit on this card is $9,000.

Annika sold her soil testing kits for $100 each, and her gross revenue from the business in her first year was $100,000. She had been making $50,000 per year when working at her previous job, and she calculated that she should make at least that much to justify the time spent in the business. Her sister spent four hours per week for 50 weeks doing the office work, at a rate of $25 per hour.

For all questions below, clearly state any additional assumptions you make.

- Prepare a balance sheet as of the first day Annikas business (i.e., after she purchased the initial assets needed and borrowed money to start her business). The date for the balance sheet is December 31st, 2020.

- Prepare an income statement for Annikas first year of business (from January 1st to December 31st, 2021). Assume that Annika makes payments to the bank and her father on December 30th, 2021, and that Annika does not make any contributions (e.g., CPP, QPP) on her sisters wages and that she does not have to pay any provincial or federal income taxes.

- Prepare a balance sheet as of the end of the first year for Annikas business (i.e., as of December 31st, 2021).

- Prepare a cash flow statement for Annikas first year of business.

- Does Annika have enough cash to meet her obligations for the first year of her business? If not, how can she make sure she makes her debt payments? Discuss Annikas situation as she assesses her ability to pay for expenses in 2021.

- Does Annika make enough profit to justify continuing to work for herself? What would you do if you were in Annikas position? Explain your answer.