Prepare a multi-step Income Statement and a classified Balance Sheet

Background:

  • In 2021 Adrian Edmonds decided to open a laundry and dry-cleaning establishment near Tucson, AZ.  Adrian organized the business in the form of a corporation.  During the first month of operations (May 2021), the following events took place.  At the end of the first month, Adrian wants to assess the financial condition of the company.  He has asked you to prepare an income statement and balance sheet to assist him in this task.

Instructions:

  • Record the external and internal events related to Edmond Laundry’s first month of operations, either using the F-SET. Prepare the financial statements as of the end of the first month of operations. Ignore income taxes for purposes of this assignment. Use your judgment as to how to classify expenses on the income statement.

Deliverables:

  1. F-SET with increases/decreases for all external and internal events, including adjusting entries and closing entries. If you use a spreadsheet, list the accounts as columns, with assets listed in order of liquidity and liabilities listed in order of maturity (to the best of your ability).
  2. Prepare a multi-step Income Statement and a classified Balance Sheet. Multi-step income statements have totals for gross profit and operating income.  Classified balance sheets have totals for current assets and current liabilities.
  3. Prepare a Statement of Cash Flows (either method for the operating section is acceptable).
  4. Answer the following questions. Please limit your answers to 1-2 sentences per question. (up to 1% extra credit)
    1. Calculate Edmond Laundry’s return on assets. Is this a meaningful number for an early-stage company? Explain your reasoning.
    2. Are operating cash flows negative or positive? Do you expect operating cash flows to be positive or negative next month?
    3. Calculate Edmond Laundry’s current ratio. Is this a meaningful number for an early-stage company? Explain your reasoning.

Transactions:

May 1.  Adrian opened a bank account in the name of Edmond Laundry and deposited $20,000 in the account. 

May 1.   Adrian located a store front which was appropriate for a laundry business and paid the landlord $2,000 advance for the first two months of rent.

May 1.   Adrian went to Tucson Savings and Loan and borrowed $8,000 to finance the purchase of laundry equipment.  The 2-year loan carries interest an annual interest rate of 12%, and interest payments are due every six months.

May 2.   Adrian purchased 10 washers and dryers, paying cash of $18,000.  The equipment is expected to last for 10 years with zero salvage value.

May 10.  Adrian purchased on account various cleaning supplies for $2,000.

May 11.  Adrian hired Sarah, a graduate of the local high school to work at Edmond Laundry for $8 per hour. Sarah will help launder clothes and interact with customers. Sarah is paid every two weeks.

May 15.  Stan Greene is a new customer and takes advantage of Edmond Laundry’s new customer special of unlimited laundry services for $100/month. Stan commits to 3 months of service on May 15th and gives Adrian $300 cash. The contract begins on May 15th.

May 18.  During the week, Adrian performed $300 of cleaning services for non-contract customers. These customers pay in cash.

May 25.  During the week, non-contract customers were charged a total of $600 for cleaning services, and $350 was received in cash. The other customers asked for credit, which was granted.

May 25.  Sarah worked 60 hours in the first two weeks and was paid for her services. 

May 27.  The company paid $1,000 to suppliers for the supplies purchased on account.

May 28.  Non-contract customers paid $100 which was owed for services performed the prior week.

May 29.  Adrian paid $200 for utilities for the month of May.

May 31.  $850 of cleaning services for non-contract clients was performed during the week, of which $500 was collected in cash.

Additional information:

1.  As of May 31, Sarah has worked 40 hours but has not been paid. Sarah gets paid every 2 weeks (14 days), so her next paycheck will be on June 8th.

2.  There is $1,750 of supplies remaining in the supply closet at the end of May.

3. Edmond Laundry uses the straight-line depreciation method.