a. Prepare the annual pro forma financial statements that you would expect Mary to preparebased on her comments about her expectations for the business. Assume no principal willbe repaid on the loan.b. Review the statements you prepared for the first requirement and prepare a list of reasonswhy actual results for Jason and Mary's business probably will not match their budgetedstatements. Mary Helu and Jason Haynes recently graduated from the same university. After graduationthey decided not to seek jobs at established organizations but, rather, to start their own smallbusiness hoping they could have more flexibility in their personal lives for a few years. Mary'sfamily has operated Mexican restaurants and taco-trucks for the past two generations, andMary noticed there were no taco-truck services in the town where their university was located.To reduce the amount they would need for an initial investment, they decided to start abusiness operating a taco-cart rather than a taco-truck, from which they would cook and servetraditional Mexican-styled street food.They bought a used taco-cart for $18,000. This cost, along with the cost for supplies to getstarted, a business license, and street vendor license brought their initial expenditures to$22,000. They took $5,000 from personal savings they had accumulated by working part timeduring college, and they borrowed $17,000 from Mary's parents. They agreed to pay interest onthe outstanding loan balance each month based on an annual rate of 5 percent. They will repaythe principal over the next few years as cash becomes available. They were able to rent spacein a parking lot near the campus they had attended, believing that the students would welcometheir food as an alternative to the typical fast food that was currently available.After two months in business, September and October, they had average monthly revenues of$25,000 and out of pocket costs of $22,000 for rent, ingredients, paper supplies, and so on, butnot interest. Jason thinks they should repay some of the money they borrowed, but Mary thinksthey should prepare a set of forecasted financial statements for their first year in businessbefore deciding whether or not to repay any principal on the loan. She remembers a bit aboutbudgeting from a survey of accounting course she took and thinks the results from their firsttwo months in business can be extended over the next 10 months to prepare the budget theyneed. They estimate the cart will last at least four years, after which they expect to sell it for$6,000 and move on to something else in their lives. Mary agrees to prepare a forecasted (proforma) income statement, balance sheet, and statement of cash flows for their first year inbusiness, which includes the two months already passed.

Income statements are necessary for businesses since they benefit both the company and its…

Answered: a. Prepare the annual pro forma…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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