The preceding case outlines a business started by David. The business began in 2021 and it specializes in selling medical aids/devices (e.g., walkers, grippers, ambulatory devices, wheelchairs, etc.) to be used by patients. It is your job to create an income statement, balance sheet, and cash flow statement for David to assist him when preparing his first financial report.
Journal Entries for Medical Company
Debit
Credit
1 Cash
Common stock
50,000
2 Cash
Bank loan
50,000
3 Rent expense
Furniture and fixtures
Freight expense
Computer and software
Cash register
Website
Wages and salaries expenses
Insurance expenses (prepaid insurance)
Advertising expense
Office supplies
Utilities expense
Accounts payable
Transportation expenses for purchases
Bank loan for repayment
Cash register
36,000
50,000
4,600
3,870
2,700
3,000
110,400
2,400
5,800
4,560
4,500
498,790
10,250
20,000
4 Cash
Accounts receivable
Sales
43,141
537,000
5 Credit card discounts
Accounts receivable
Calculation (680141 – 43141) x .03
19,110
6 Sales returns and allowances
Unearned revenue
Sales returns
28,560
7 Unearned revenue
Sales
Calculation (28560 – 2460)
26,000
8 Cash
Accounts receivable
Calculation (637000-19110-2420 (balance))
615,470
50,000
50,000
756,870
580,141
19,110
28,560
26,000
615,470
9 Furniture and fixtures
Freight expense
4,600
4,600
10 Prepaid insurance
Insurance expense
Calculation: 2400/12 months – 1200
200
11 Office supplies
Utilities expense
Office supplies payable
Utilities payable
750
500
200
750
500
12 Inventory
Accounts payable
599,500
13 Inventory (freight)
Transportation expense
10,250
14 Accounts payable
Inventory returns
4,560
15 Cost of goods sold expense
Inventory
Calculation: 599500-10250-4560-124500
599,500
10,250
4,560
480,690
480,690
16 Office supplies (expense)
Office supplies inventory
Calculation: 4560+750-1470 (ending balance)
3,840
17 Interest expense
Interest payable
Calculation: 50000 x .04
2,000
18 Depreciation expense: Furniture and fixtures
Depreciation expense: Computer and software
Depreciation expense: Cash register
Accumulated depreciation: Furniture and fixtures
Accumulated depreciation: Computer and software
Accumulated depreciation: Cash register
Calculation: 54600/5 years = 10920
Calculation: 3870/3 years = 1290
Calculation: 2700/3 years = 900
10,920
1,290
900
19 Amortization expense: Website
1,500
3,840
2,000
10,920
1,290
900
Website
Calculation: 3000/2 years
1,500
20 Sales
Income summary
706,141
21 Income summary
Sales returns and allowances
Credit card discounts
48,450
22 Income Summary
Rent expense
Wages and salaries expense
Insurance expense
Advertising expense
Office supplies expense
Utilities expense
Amortization expense
Interest expense
Depreciation expense (total)
179,850
23 Income summary
Cost of goods sold expense
480,690
24 Retained earnings
Income summary
706,141
28,560
19,110
36,000
110,400
2,200
5,800
3,840
5,000
1,500
2,000
13,110
480,690
2,069
2,069
480690
720
637010
26000
94051
695650
Journal Entries for Medical Company
Debit
1 Cash
Common stock
2 Cash
Bank loan
3 Rent expense
Furniture and fixtures
Freight expense
Computer and software
Cash register
Website
Wages and salaries expenses
Insurance expenses (prepaid insurance)
Advertising expense
Office supplies
Utilities expense
Accounts payable
Transportation expenses for purchases
Bank loan for repayment
Cash register
4 Cash
Accounts receivable
Sales
5 Credit card discounts
Accounts receivable
6 Sales returns and allowances
Unearned revenue
Sales returns
7 Unearned revenue
Sales
8 Cash
Accounts receivable
Credit
9 Furniture and fixtures
Freight expense
10 Prepaid insurance
Insurance expense
11 Office supplies
Utilities expense
Office supplies payable
Utilities payable
12 Inventory
Accounts payable
13 Inventory (freight)
Transportation expense
14 Accounts payable
Inventory returns
15 Cost of goods sold expense
Inventory
16 Office supplies (expense)
Office supplies inventory
17 Interest expense
Interest payable
18 Depreciation expense: Furniture and fixtures
Depreciation expense: Computer and software
Depreciation expense: Cash register
Accumulated depreciation: Furniture and fixtures
Accumulated depreciation: Computer and software
Accumulated depreciation: Cash register
19 Amortization expense: Website
Website
20 Sales
Income summary
21 Income summary
Sales returns and allowances
Credit card discounts
22 Income Summary
Rent expense
Wages and salaries expense
Insurance expense
Advertising expense
Office supplies expense
Utilities expense
Amortization expense
Interest expense
Depreciation expense (total)
23 Income summary
Cost of goods sold expense
24 Retained earnings
Income summary
Income Statement for Year ending May 31 2022
Sales
Less: Credit card discounts
Sales returns
Net sales
Cost of Goods Sold:
Purchases
Plus: Freight in
Less: Purchase returns
19,110
28,560
47,670
658,471 net sales
599,500
10,250
609,750
4,560
605,190
124,500
Less: Inventory: May 31, 2022
480,690
177,781 gross prpfis
Gross profit on sales
Operating Expenses:
Wages and salaries
Insurance
Rent
Office supplies*
Advertising
Utilities
Amortization: Website
Depreciation:
Furniture and fixtures
Computer and software
Cash register
Total Operating Expenses
680141
637010
706,141
110,400
2,200
36,000
3,840
5,800
5,000
1,500
10,920
1,290
900
2400
4560
4500
3000
50000
3870
2700
13,110
177,850
Net Loss before interest expense and before income
Interest expense
(69)
(2,000)
Net Loss after interest expense and before income taxes
(2,069)
Less: Income taxes
Net Loss after interest expense and income taxes
0
(2,069)
28560
0.03
2560
gross prpfis
200
750
30
500
2years
4600
54600 5 years
3years
3years
Balance Sheet for Year Ending May 31, 202
Assets
Current Assets
most liquid
least liquid
Total Current Assets
Cash
Account receivable
Inventory
Prepaid insurance
Office supplies
1,741
2,420
124,500
200
1,470
130,331
Fixed Assets
Furniture and fixtures
Less: accumulated amortization
54,600
10,920
Website
Less: accumulated amortization
3,000
1,500
Computer and software
Less: accumulated amortization
3,970
1,290
Cash Register
Less: accumulated amortization
2,700
900
43,680
1,500
2,580
1,800
Total Fixed Assets
49,560
Total Assets
179,891
for Year Ending May 31, 2022
Liabilities and Shareholder Equity
Current Liabilities
50000(4%)
Accounts payable
Unearned revenue
Interest payable
750,500 Other accounts payable
96,150
2,500
2,000
1,250
Total Current Liabilities
101,900
Long-term debt
Bank Loan
50000
20000
Common stock
Less: Deficit
50,000
(2,069)
Total Liabilities
3,000
131,960
Shareholders’ equity
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
47,931
179891
Statement of Cash Flows (ending May 31, 2022)
Operating Activities
Net Income
Add: Amortization
(2,069)
14,610
12,541
Working Capital Changes
Accounts receivable
Inventory
Other current assets
Accounts payable
Other payables
Unearned revenue
Interest payable
(2,069)
(124,500)
(1,670)
-96,150
1,250
2,600
2,000
(26,630)
Net cash provided by operating activities
(14,089)
Investing Activities
Furniture and fixtures
Computer and software
Cash register
Website
Net cash used by investing activities
(54,600)
(3,870)
(2,700)
(3,000)
(64,170)
Financing Activities
Equity
50,000
Bank loan
50,000
Repayment of bank loan
(20,000)
Net cash provided by financing activities
80,000
Net increase in cash
1,741
10920+1500+1290+900
Debits/Credits at David’s Home Health Company
David opened his home health company, specializing in aids/medical devices to be used at home. The
company has been in existence for over one year.
Start-Up Funding
David invested $50,000, a combination of his savings and money borrowed from his parents, in 50 shares of
common stock on June 1, 2021. In addition,
• David set up a five-year bank loan for $50,000, cosigned by his brother, which was deposited on
June 1, 2021.
• The loan interest rate was prime, 3% per year plus 1% with interest paid annually on June 1st each
year.
• Interest was calculated on the loan’s outstanding balance at the beginning of the year. On May 31,
2022, David repaid $20,000 of the bank loan.
Cash Disbursements
David’s cash disbursements for his company were as follows:
Accounts payable to merchandise suppliers $498,790
Transportation costs on purchases
10,250
Furniture and fixtures
50,000
Freight on furniture
4,600
Website
3,000
Rent
36,000
Wages and salaries
110,400
Insurance
2,400
Office supplies
4,560
Advertising
5,800
Computer and software
3,870
Cash register
2,700
Utilities, Internet, postage, etc.
4,500
Bank loan principal repayment
20,000
Location
David’s company is located in a strip mall and leased about 4,500 square feet at an annual cost of $360 per
square foot. The lease was for two years from June 1, 2021 to May 31, 2023. Rent was paid on the first of the
month.
Sales
Gross sales for the first fiscal year totaled $680,141, of which $43,131 had been for cash while the remaining
sales were on credit. Credit card charges averaged 3% of total credit sales. Total sales returns amounted to
$28,560. All customers, regardless of how they paid for their purchases, were given credit vouchers (not
cash) for the amount of a return that could be used at some point in the future. At the end of May, 2021, there
were $2,560 outstanding credit vouchers. The ending balance of accounts receivable from customers was
$2,420.
Equipment Purchases
The furniture and fixtures (including chairs and tables, light fixtures, and racks) were purchased in May 2021
and arrived on time for the store opening. The freight of these items amounted to $4,600. These items are
expected to have a five-year life after which time David anticipates either a move to larger facilities or the
renovation of the existing facility. For $3,870, David purchased a computer installed with specific software
for medical operations. The effective life of the computer is estimated to be 3 years. The cash register system
was integrated into the computer system. Its cost was an additional $2,700 with an estimated life of 3 years.
Website Development
One of David’s friends set up a website incorporating all the latest features used on the best websites and
didn’t charge David a lot of money for development. David anticipated the website would need a major
overhaul in two years.
Operations
The store is open seven days a week, 10:00am to 9:00pm Monday to Saturday and 11:00am to 6:00pm on
Sunday. David plans to hire a manager, a full-time salesperson and several part-time sales staff. The wages
are as follows:
Manager
$3,000 per month
Salesperson
$2,500 per month
Part-time staff
$700 per month
In addition, David pays himself an annual salary of $36,900. All salaries and wages are paid on the last day
of the month.
Other Information
On July 1, 2021, David purchased a comprehensive insurance policy for $2,400 for a full year’s coverage of
operations.
Earlier in the year, he contracted out for advertising to run promotional ads three times a year (November
15th, December 10th, and April 22nd) as well as regular monthly ads that concluded on May 15th for a total
cost of $5,800. Payment for all advertising was required prior to the advertisement’s publication data.
The office supplies (including postage) and utilities and Internet bills were paid the month following the
receipt of these bills. As of May 31, 2022, a bill for $750 for office supplies and a bill for $500 for utilities
and Internet for the month of May were outstanding.
Purchasing of all medical supplies for the fiscal year ending May 31, 2022 amounted to $599,500. All
purchases were made on credit terms of 60 days. Purchases include in this total for April and May were
$56,700 and $39,450 respectively. David’s suppliers shipped purchased goods and as a result David paid
$10,250 in transportation costs when the goods were delivered. In early January 2022, David returned $4,560
worth of goods. The suppliers agreed to bear the cost of the return transportation. Since David did not pay for
the goods, the suppliers reduced David’s outstanding balance.
After closing on May 31, 2022, David and the manager counted the entire inventory on hand and costed it at
$124,500. The inventory of office supplies was also counted and totaled $1,470. David’s business was
subject to a corporate tax rate of 20%. Income taxes were to be paid 6 months after David’s fiscal year
ended.
Assignment:
Create the following financial statements:
• Income Statement
• Balance Sheet
• Cash Flow Statement
What conclusions can you draw?
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