Heather and Dan Holt met while both were employed in the interior trim and upholstery department of an auto manufacturer. After their marriage, they decided to earnsomeextra income by doing small jobs involving canvas, vinyl, and upholstered products. Their work was considered excellent, and at the urging of their customers, they decided to go into business for themselves, operating out of the basement of the house they owned. To do this, they invested $120,000 cash in their business. They spent $10,500 for a sewing machine (expected life 10 years) and $12,000 for other miscelianeous tools and equipment (expected life 5 years). They undertook only custom work, with the customers purchasing the required materials, to avoid stocking any inventory other than supplies. Generally, they required an advance deposit on all jobs. The business seemed successful from the start, as the Holts received orders from many customers. But they felt something was wrong. They worked hard and charged competitive prices. Yet there seemed to be barely enough cash available from the business to cover immediate personal needs. Summarized, the checkbook of the business far 2002, their second year of operations, showed: Balance, January 1,2002 balance, 12/31102 $99,200 cash received from customers for work done in 2001 $36,000 for work done in 2002 200,000 for work to be done in 2003 48,000 284,000 383,200 Cash paid out: Two years insurance policy, dated 1/1/02 $19,200 Utilities 48,000 supplies 104,000 other expenses 72,000 taxes, including sales taxes 26,400 dividends 40,000 309,600 balance, 12/31/02 $73,600 Considering how much they worked, the Holts were concerned that the cash balance decreased by $25,600 even though they only received dividends of $40,000. Their combined income from the auto manufacturer had been $65,000. They were seriously considering giving up their business and going back to work for the auto manufacturer. They turned to you for advice. You discovered the following: Of the supplies purchased in2002, $24,000 were used on jobs billed to customers in 2002; no supplies were used for any other work. Work completed in2002 and billed to customers for which cash had not yet been received by year-end amounted to $40,000. Your first step in the analysis is to rough out an income statement for the Holts in2002
Heather and Dan Holt met while both were employed in the interior trim and upholstery department of an auto manufacturer. After their marriage, they decided to earnsomeextra income by doing small jobs involving canvas, vinyl, and upholstered products. Their work was considered excellent, and at the urging of their customers, they decided to go into business for themselves, operating out of the basement of the house they owned. To do this, they invested $120,000 cash in their business. They spent $10,500 for a sewing machine (expected life 10 years) and $12,000 for other miscelianeous tools and equipment (expected life 5 years). They undertook only custom work, with the customers purchasing the required materials, to avoid stocking any inventory other than supplies. Generally, they required an advance deposit on all jobs.
The business seemed successful from the start, as the Holts received orders from many customers. But they felt something was wrong. They worked hard and charged competitive prices. Yet there seemed to be barely enough cash available from the business to cover immediate personal needs. Summarized, the checkbook of the business far 2002, their second year of operations, showed:
Balance, January 1,2002
balance, 12/31102 $99,200
cash received from customers
for work done in 2001 $36,000
for work done in 2002 200,000
for work to be done in 2003 48,000 284,000
383,200
Cash paid out:
Two years insurance policy, dated 1/1/02 $19,200
Utilities 48,000
supplies 104,000
other expenses 72,000
taxes, including sales taxes 26,400
dividends 40,000 309,600
balance, 12/31/02 $73,600
Considering how much they worked, the Holts were concerned that the cash balance decreased by $25,600 even though they only received dividends of $40,000. Their combined income from the auto manufacturer had been $65,000. They were seriously considering giving up their business and going back to work for the auto manufacturer. They turned to you for advice. You discovered the following:
- Of the supplies purchased in2002, $24,000 were used on jobs billed to customers in 2002; no supplies were used for any other work.
- Work completed in2002 and billed to customers for which cash had not yet been received by year-end amounted to $40,000.
Your first step in the analysis is to rough out an income statement for the Holts in2002
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