Like many new graduates in 2016, Marie Little struggled to find a sustained professional job. In early March she had finally found a good position, but was laid off by June. This ended her brief corporate career, finding herself once again without income. Marie packed her personal items from her office cubicle, passing too many empty spaces created by temporary tan walls. It was a long walk through the lending companys hall, but she began to think about starting her own businessas far away from mortgage institutions as possible. She began to think; If I own the business they cannot lay me off and I can actually create a business where I can use my degree. Like many hired by the giant lender, she had no financial experience. Her job had been to sell a mortgage product and push her customers into a longer term refinance agreement with upfront profitable fees for her financial institution. Financial knowledge was not a premium, the institution wanted sales.

Marie had graduated from the College of Arts, Science, and Letters with a bachelors degree majoring in art, but had also taken a few elective courses in web design. During her summer breaks she had working for a marketing firm in their web advertising department. The job had been interesting, which was why she enrolled in the three elective web design and development courses. She decided to rely on her summer job experience in developing web pages for clients. The five years she spent getting an art degree would also be helpful, and could be easily applied to her technical web design skills. And it would certainly be a lot less boring than selling the same mortgage productover and over again. After a week of notes and thoughts, she began to formalize her strategy into a business plan. The purpose of Maries firm would be to create original, on the edge web sites, web advertisements, and consult on existing web page designs. She knew of several similar companies in the southeast area of the state, and planned to focus on the metro area, eventually expanding into most of the southern part of the state.

On June 20, 2016, she transferred all of her savings, $22,000, to a new bank account with the company name, and two days later she added $31,000 borrowed from her Mom to the account. After that things moved quickly as she rented a second floor office, with a one lease for $3,400 a month, paying one months rent in advance as a security deposit to apply to the end of the lease, and $3,400 for July 2016. She purchased some used computer equipment with software from her last employer, and ordered stationary and office supplies that cost $3,600 when they were delivered on June 29.

Websites by Marie opened for business on July 2, 2016. Although Marie was not an accountant, she took stock of her companys financial position as she began to seek her first contracts. The company had spent all but $12,600 of the cash that had been put into the bank account, but it had some assets as well.

Assets Liabilities and Owners Equity

Cash in bank $12,600 Loan $31,000

Office supplies 3,600 Maries equity 22,000

Equipment and software 30,000

Prepaid rent 6,800

Marie was a little worried that the cash had gone so quickly, but she also had confidence in herself and her willingness to work hard.

In the first few days, Marie lined up two webpage design projects from local businesses. She spent part of each day working on the projects, and the remainder of her time was spent looking for new clients. By early August she had hired four other designers at work and a steady stream of new work coming in by way of referrals. She also felt far too busy to attend to any financial aspects of the business. When clients paid, the money went into the bank account. The associates were paid weekly, and she paid rent and other bills when they were received. In the ninth week of operations, Maries Mom telephoned her to ask how things were going, and she could not answer the question with any confidence. It was time for an accounting, and the end of August would be a good time to do it.

Little found the following information she had accumulated during the two months of operations:

Clients had paid $40,000 for completed work, and two clients still owed a total of $8,900 for work that had been completed and delivered to them. On August 31st, a client paid $2,000 in advance for future work, however, there were no projects underway as the office closed on August 31 for the Labor Day weekend.

Additional office supplies had been purchased for cash of $1,000, and office supplies and stationery that had cost $2,800 were still on hand.

Rent of $6,800 for August and September was paid in cash. Utility bills of $1,900, a repair of equipment of $2,900, and salaries paid to designers of $21,100 (including Marie Little) were also paid in cash, with $10,000 in salaries accrued, but not paid to date.

Additional equipment and software was purchased on August 27 for $14,000, with half of that amount being paid in cash and the remainder due one month later.

As Marie thought about the first two months operations, she was perplexed by the fact that cash in the bank had decreased even though she was sure the business was operating profitably.

She also wondered how to account for the following:

She had agreed to pay her mom interest on his loan of 4% per year, but no interest had been paid so far.

The equipment and software were working out well, but Little knew that they had a technological life of no more than three years from the time that she had purchased them.

In brief, Marie felt that the first two months had been successful, but she was puzzled about how to draft meaningful reports to mail to her brother.

You are a friend of Marie and a recent graduate of the MBA program. You are looking for work as a business consultant. Knowing your excellent credentials, Marie has asked you to help her get her business finances in order, report on the status of her business and make any recommendations that you can to help her make her business a success. She cannot pay you but she would be willing to help you set up your own webpage. Having taken financial accounting and eager to show off your newly acquired business skills, you accept her offer. You want the report to be very professional so you decide to perform the following:

Prepare an income statement and a classified balance sheet.

Other assumptions:

The books are to be prepared using the accrual method of accounting.

The tax rate is 21%.

Depreciation is computed using the straight line method.

The business started on 6-20-15 when it was formed