Background

Lily Rosenwald had always wanted to be a florist. She spoke with three friends and asked then to help her start her new business. They agreed and on January 1, 2002, two friends made an investment and one a loan to Lily's business, Lilly's Green Thumb. Lily's friend, Sally, gave her a new truck valued at $20,000 to use for floral deliveries. Lily estimated that the truck had a ten-year useful life. Vivian, Lily's other friend gave Lily $10,000 as start-up capital, which Lily deposited in a new bank account in the name of her new business. In return for their investment, Lily issued common stock to them. Lily's friend, Frank also loaned Lily $2000 for her business.

Lily rented space for her flower shop, purchased supplies and inventory, and hired two staff people ( one to work the counter and the other to make deliveries. Although hers was primarily a cash and national credit card business, Lily did bin select commercial customers monthly for large flower and landscaping orders. As her monthly business grew, Lily decided to apply for a bank loan to borrow funds for further expansion. Because she had been so busy, Lily realized she had kept few records other than the business checkbook and a list of amounts owed to her by customers. She realized that she would need a complete set of financial statements for the period ended March 31, 2002. She has asked you to prepare a beginning and ending balance sheet and income statement for her business.

On March 31, 2002, Lily's Green Thumb's checkbook shows a balance of$55,500 and her customers still owe her $15,000. During the period, the business collected $60,000 from customers. The checkbook lists payments for supplies totaling $2,000, and inventory totaling $3,000. Of the supplies and inventory, $600 and $1,000 is still on hand, respectively. She paid employees $5,200 and still owes them $800 for the last week of March. Lily purchased on account equipment from Office Works, Inc. for $6,000, payable on April 1, 2002. She estimates a 3-year useful life for the equipment. She paid $1,500 in rental expense for her office space during the period. She, also, paid $800 to repair the muffler on her truck. She paid dividends to her friends of $2,000 for the period. Finally, Lily paid Frank back the money she borrowed on March 15, 2002.

You have been hired by Deep Pockets Bank to compile Lily's financial statements and evaluate the viability of the business.

Question Required:

1. Prepare the income statement of Lily's Green Thumb for the three months January 1 through March 31, 2002. The business is not subject to income taxes.
2. Prepare the beginning and ending balance sheets of Lily's Green Thumb at January 1, 2002 and March 31, 2002.
3. Evaluate for the bank whether Lily's Green Thumb is a good business venture and whether they should make the loan to Lily's Green Thumb. Why or Why not?