Chapter 1, Problem 1.2P

Analyzing a Student's Business and Preparing an Income Statement

During the summer between his junior and senior years, James Cook needed to cam sufficient money for the coming academic year. Unable to obtain a job with a reasonable salary', he decided to try the lawn care business for three months. After a survey of the market potential, James bought a used pickup truck on June 1 for $1,800. On each door he painted “James Cook Lawn Service. Phone 471-4487.” He also spent $900 for mowers, trimmers, and tools. To acquire these items, he borrowed $3,000 cash by signing a note payable promising to pay the $3,000 plus interest of $78 at the end of the three months (ending August 31).

By the end of the summer, James had done a lot of work and his bank account looked good. This prompted him to wonder how much profit the business had earned.

A review of the check stubs showed the following: Bank deposits of collections from customers totaled $15,000. The following checks had been written: gas, oil, and lubrication, $1,050; pickup repairs, $250: mower repair, $110; miscellaneous supplies used, $80; helpers, $5,400: payroll taxes, $190; payment for assistance in preparing payroll tax forms, $25: insurance, $125; telephone, $110: and $3,078 to pay off the note including interest (on August 31). A notebook kept in the pickup, plus some unpaid bills, reflected that customers still owed him $700 for lawn services rendered and that he owed $180 for gas and oil (credit card charges). He estimated that the cost for use of the truck and the other equipment (called depreciation) for three months amounted to $600.

Required:

1. 1. Prepare a quarterly income statement for James Cook Law n Service for the months June, July, and August. Use the following main captions: Revenues from Services, Expenses, and Net Income. Assume that the company will not be subject to income tax.
2. 2. Do you see a need for one or more additional financial reports for this company for the quarter and thereafter? Explain.