(Preparing financial statements, LO 1, 4) Exstew Ltd. (Exstew) is a newly formed advertising agency. The agency was formed on May 1, 2004 by three friends from university who graduated several years ago and had been working in advertising until recently. Each of the friends contributed $35,000 to Exstew in exchange for shares in the company. In addition, they arranged a $75,000 line of credit from the bank. On August 1, 2004 Exstew arranged to rent office space in prestigious downtown offices at a cost of $4,000 per month. Rent had to be paid in advance on the first day of August, December, and April. Each payment was for $16,000. Exstew also purchased office furniture and equipment for $30,000. The furniture and equipment is being amortized over five years.

During fiscal 2005 Exstew earned $110,000 providing services to customers. As of April 30, 2005 Exstew was owed $65,000 from customers. During fiscal 2005 it paid salaries of $57,000, incurred advertising costs of $25,000, and incurred various other costs of $17,000. At the end of the year Exstew owed employees $2,700 and owed various other suppliers $9,200. As of April 30, 2005 Exstew had borrowed $42,000 against its line of credit. Interest on the borrowed money was $2,300.

Required:

Exstew’s April 30, 2005 year end has recently passed and you have been approached by the three friends to prepare financial statements for the year. Use the information above to prepare a balance sheet, an income statement, and a cash flow statement.

Exstew does not believe it will have to pay taxes for 2005. Use the financial statements you prepared to assess the financial situation of Exstew. Your assessment should consider information from all of the financial statements.