PART 1:

Big Wave Surf Shop Inc has hired you to assist them with accounting for their new retail business. The owners, Willie Wipeout and Sandy Shu, each contributed $10,000 to open the business. They are 50/50 owners and do not know anything about recording transactions or preparing financial statements. They request that you post the transactions from last month and prepare a simple financial statement, so they know how their business is performing. Here are the other transactions that occurred during the month.

• They opened a checking account at First Hawaii Trust and deposited their initial investment.
• They made a security deposit of $500 on the building they are renting and paid the first months rent of $2,500.
• They purchased $15,000 in inventory on credit with their supplier with 90-day terms.
• They were approved for a Line of Credit at their bank for $25,000.
• They purchased ads in the local paper for $250.
• They took out an insurance policy on the contents of their store which included liability coverage. The coverage will last 12 months. They paid $1,200.
• They purchased ads on the local radio station for $700.
• They withdrew $500 from their bank for the cash drawer to make change.
• They received their Electric bill for $180, cable bill for $110 and a water bill for $75.
• They had cash sales of $1,800 during the month which they deposited at the end of each day. The total cost of the items sold was $1,200
• They had sales on account of $3,000 during the month. The total cost of the items sold was $2,000.
• On the last day of the month, they paid the electric bill and water bill.
• On the last day of the month, they paid $5,000 to their inventory vendor.

They ask you to create a spreadsheet that summarizes the transactions and prepare a balance sheet and profit & loss statement on the accrual basis for them to review.

PART 2:

Based on the financial statements that you prepared, answer the following questions.

1. What is their net income at the end of the month?
2. What are their Total Assets at the end of the month? Total Liabilities?
3. How much cash is in the bank?
4. What is the Cost of Goods Sold at the end of the month?
5. How much inventory do they have on hand?
6. What is their gross profit margin and gross profit percentage at the end of the month?
7. How much would they have to increase or decrease their prices to achieve a 50% Gross Profit Percentage?

HINT: Research gross profit margin and mark-up for the formula if you do not know it.