Prodigy Systems Ltd (PSL) was created by Jesse Gemmel, a third-year undergraduate business student. Unable to find work in a business setting, Jesse started up his own business during the summer months. Jesse was able to secure the services of his uncle. Pierre Chalut, to incorporate the company.

Prior to attending university, Jesse was involved in various athletic activities. In addition, Jesse has taken many kinesiology courses during his undergraduate studies. Jesse has always had a passion for fitness and athletics and spends more time in the gym than in class! Therefore, Jesse is trying to turn his passion into his business by incorporating PSL with the purpose of developing and distributing fitness-related products.

PSL began operations in 1^st of April 2020, and continued until the end of August 2020, at which point Jesse had to return to university to complete his degree. Jesse invested $2,500 of his savings into PSL, and also took out a loan of $1,000 from his father( Not payable for next 5 years).

During its first summer of operations, PSL designed and sold DVDs for beginners. Jesse recorded the videos with the help of a friend, a professional videographer, who was paid $750 by PSL. The videos focus on basic stretches, workouts, and diet tips. The DVD cover was designed by a professional in the community for $500. Jesse purchased 250 high-quality DVDs for $5 each, including the jewel case, and made copies of his video on his personal computer and packaged the videos to be ready for sale. PSL incurred $200 in printing costs for the front and back covers. The business has a credit card it used to pay for certain expenses, but the credit card had no balance at the end of September.

A total of $2,000 was used to purchase new gym equipment for the video shoots. The equipment can be used for at least another three years to produce videos. In addition, PSL spent an additional $400 on the appropriate software to copy the videos.

Jesse promoted the video at local gyms, and virally on YouTube and Facebook. During the course of the summer months, PSL sold all 250 copies of the DVD for $30 each. A local gym has purchased 100 copies of the DVD to give away to its members but promised to pay PSL in December 2020.

It is now September 1, 2020, and Jesse is reflecting upon the first five months of PS's operations. Given that the new semester is about to begin, and tuition payments are coming due, Jesse would like to know how PSL performed.

He is fairly excited because PSL sold $7,500 worth of DVDs, which he believes could be used to cover his tuition and book costs.

SCENARIO:

As Jesse's best friend, who is majoring in accounting, you have been asked to prepare a report on PS's financial performance over the past five months. Specifically, Jesse has asked you to consider the following

PSL's balance sheet

PSL's income statement.

1. What does the accounting information inyour Balancesheet and income statement say about Jesse's business ability to pay 3000 $ salary to him as a manager?
2. The bank has said that it will only provide a loan if the business has twice as much equity than debt. PSL is applying for a bank loan in the near future to expand operations and develop a new video. How can the accounting information be used by the bank to decide whether credit should be provided to PSL?
3. Jesse would like to know if the bank will accept the financial statements as prepared by PSL, or whether the statement will need to be audited. What benefit does an audit provide to the bank?

Note* No Depreciation and Amortization being considered for this period of operation