You are a newly hired accountant for Yellow Leaf Fashion Inc., a local women’s apparel retailing company. The current accounting system provides an unadjusted trial balance as of December 31, 2014, and additional information necessary to prepare the financial statements. The president of the company wants you to prepare a balance sheet, income statement, and statement of cash flows for the year, and a basic financial statement analysis that can facilitate the assessment of its performance and financial position at the store managers’ meeting.

Yellow Leaf Fashion Inc. was incorporated on December 31, 2011, with 100,000 shares of $1 par value common stock authorized. Eighty thousand shares were issued at $6 per share on December 31, 2011. An additional 8,000 common shares were issued at $8 per share on June 30, 2013. The company's accounting period ends on December 31 of each year.

Additional Information for Adjusting Journal Entries:

1.The company uses the first in, first out method on a periodic basis. Physical counts are conducted at the end of the year to determine the quantity and value of merchandise inventory on hand and cost of goods sold. As the result of a physical count, year-end merchandise inventory was determined to be $546,300.

2.All store equipment was purchased at the beginning of 2012. Yellow Leaf Fashion Inc. expects that the equipment has an estimated useful life of six years, with a residual (salvage) value of $20,000. For financial reporting purposes, it uses the straight-line method for depreciation.

3.The company leased the store with an initial term of 10 years and a five-year extension term. Under the current lease contract, it pays a fixed annual rent of $60,000 and additional rent based on a percentage of sales over the designated level; when sales are over one million dollars, the company pays 5% of the excess sales as additional rent. Additional rent is paid three months after the fiscal year-end of the base year.

4.On September 30, 2013, the company borrowed $80,000 through a three-year note bearing interest at 6% annually. The interest is paid semi-annually.

5.The company uses the percentage of receivables method to estimate bad debt expense. At year-end the company estimates 4% of receivables will be uncollectible.  

6.On January 1, 2014, the board of directors of the company authorized the grant of 10,000 stock options to its employees to supplement their salary. Each stock option permits the purchase of one share of common stock of the company at a price of $9 per share; the market price of the stock on January 1, 2014, was also $9 per share. The options vest, or become exercisable, beginning on January 1, 2017, and only if the employees stay with the company for the entire three years’ vesting period. The options expire on December 31, 2017. On December 31, 2014, the company estimated a grant value of $6 for each of the employee stock options using an option-pricing model.

7. On December 31, 2014, the company gathered the following information to recognize income tax expenses, income tax payable, and deferred tax assets and liabilities.

a. The salaries and wages expense for 2014 includes $3,200 of life insurance premium paid for store managers, and the beneficiary is Yellow Leaf Fashion Inc.

b. For store equipment, the depreciation deduction for tax reporting is as follows:

Year	Depreciation tax deduction
2012	$110,000
2013	$90,000
2014	$70,000
2015	$60,000
2016	$20,000
2017	$10,000
Total	$360,000

Additional rental expense is not tax deductible for the year in which the company recognizes it. It will be deductible for income tax when the company pays the accrued rent liability for the next year.

Stock-based compensation expense is also not tax deductible for the year in which the company recognizes it. It will be deductible for income tax when the stock option is exercised.

Assume that the federal enacted income tax rate is 35% in 2014 and all subsequent periods.

The balance sheet, income statement, and statement of cash flows for the two previous years (2012 and 2013) and unadjusted trial balance as of December 31, 2014, are provided.