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Design's by Matt Project Matt has worked as a carpenter for 10 years. In 2012, Matt's wages were...

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Design's by Matt Project Matt has worked as a carpenter for 10 years. In 2012, Matt's wages were $26,000. Lately, Matt has been unpleased with the owner. He is convinced he could run a business that does a better work at a lower cost. Matt decided to go into business for himself and opened Design's by Matt. To get the business going, Matt decided to invest heavily in advertising. He spent $7,500 on advertising aimed at homeowners and another $1,500 on advertising aimed at getting work from other contractors. Matt also purchased construction equipment costing $5,000 and other tools and equipment costing $4,500. He estimated that the construction equipment can be used for about 5 years, before maintenance costs will be too high and the equipment will need to be replaced. The other tools and equipment are not as durable and will have to be replaced in 3 years. At the end of the first year of business, Matt received $86,000 in cash from customers for work performed. Matt was owed another $4,500 from customers who are not required to pay cash, but are billed every 30 days. A review of Matt's checkbook shows he paid the following expenses (in addition to those mentioned previously) during the first year of business:

Materials $42,000

Other supplies 11,000

Wages--part-time assistant 9,500

Rent 6,000

Insurance (2-year policy) 2,400

Utilities 2,100

Miscellaneous expenses 1,700

Matt's utility bill for the last month of the year has not yet arrived. He estimated that the bill will be approximately $325. Matt keeps some stock of materials on hand for customers who need work completed immediately. At the end of the year, about $15,000 of the materials purchased during the year was in his store stock. In addition, $2,600 in supplies had not been used yet.

Required:

1. Professionally prepare an income statement for the Year Ended 2013, which is Matt's first year of being a business owner.

2. What are your thoughts about Matt's decision to open his own business? Do you believe it was a good idea? Why or why not? Explain.

3. Would Matt have been better off with his old job? Why or why not? Explain.

Financial Statements:

Financial statements report the operational performance of a business over a certain accounting period. The financial statements are an important function in determining viability.

Answer and Explanation:


The income statement of a firm reports the sales and expenses of a company over a time period. Sales and expenses of a company are closed out to an income summary account annually which is further closed to the retained earnings account on the balance sheet. As a result, all transactions which affect the income statement affect the balance sheet of a company.


1. Professionally prepare an income statement for the Year Ended 2013, which is Matt's first year of being a business owner.


Design's by Matt Project

Income Statement

For the year ending December 31, 2013

Sales $90,500
Materials $27,000
Other Supplies $8,400
Wages - Part Time Assistant $9,500
Rent $6,000
Insurance $1,200
Utilities $2,100
Miscellaneous Expense $1,700
Advertising $9,000
Depreciation Expense - Construction Equipment $1,000
Depreciation Expense - Tools and Equipment $1,500
Total Expense $67,400
Net Income (Loss) $23,100


2. What are your thoughts about Matt's decision to open his own business? Do you believe it was a good idea? Why or why not? Explain.


While Matt's decision to open the business may not have been the most prudent, as the business matures, Matt should recognize an increased profit if expenses are controlled. The company would recognize expenses for insurance of 1/2 of the amount paid since the benefit of the full amount would be recognized over the first two years of operation. In addition, depreciation for the construction equipment would be recognized over 5 years and the tools and equipment depreciation would be recognized over the next 3. The initial start up cost of advertising was assumed to be a period cost and was fully expensed in the period incurred.


3. Would Matt have been better off with his old job? Why or why not? Explain.


Matt was unhappy at his prior job and would not have been fulfilled. While the stress and obligations of owning a business are higher for Matt, the satisfaction of owning his own business should outweigh the additional responsibilities once the business is stabilized.


  • Note: The following items would be on the balance sheet of the new company for benefit in future periods.


Accounts Receivable $4,500
Materials Inventory $15,000
Supplies $2,600
Prepaid Insurance $1,200
Construction Equipment $5,000
Less: Accumulated Depreciation $(1,000)
Tools and Equipment $4,500
Less: Accumulated Depreciation $(1,500)

Learn more about this topic:

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What Is an Income Statement? - Purpose, Components & Format

from Accounting 101: Financial Accounting

Chapter 2 / Lesson 2
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