Académique Documents
Professionnel Documents
Culture Documents
Your friend’s mother Mary Brooks has opened Mary’s Boutique Ltd. in a
nearby shopping mall. She began her business on February 1, Year
2007. She invested on that day $20,000 in share capital and her
husband Tom contributed another $20,000 as a loan to the firm. The loan
bears interest at 10% per annum and none has been paid to date.
Mary found the business exciting and she seems to have been
successful as a business person – but the question is how successful?
Mary had recorded the cost of each item sold during the year and this
totaled $24,800. The cost of the merchandise still on hand was $8,700
which leaves $1,100 of purchases unaccounted for (probably shoplifters).
The bank had deducted interest and bank charges totaling $1,400 from the
boutique bank account. The major portion of this was for interest on the
demand loan from the bank which has a principal amount of $10,000. This
loan is fully secured by a government savings bond that Mary purchased
for $10,000 for the firm when she first opened for business. The current
market value of this investment is $10,200. The boutique had received
$600 interest on this investment and another $400 had been earned but
not accrued at year end. The bank balance at January 31, 2008 shows as
$7,480
When the business was formed, a friendly insurance agent sold her a two
year business insurance policy with a premium of $480 for the two years.
She paid cash for the policy and included the bill in her miscellaneous
expenses. When she moved into the store she paid the previous occupant
$20,000 for the existing furniture and fixtures which she estimated would last
her easily another ten years. Mary maintains excellent relations with her
suppliers and has never had a dispute of any kind. She currently owes them
$6,200. Since the business is incorporated it has to pay income taxes to
Revenue Canada. She qualifies for the small business tax rate of 20%
REQUIRED:
Prepare a set of financial statements in good form to show the results of year
1 for Mary’s boutique. If you think there is missing data or just can’t come up
with the required amount, then explicitly say so and use the notation “let the
missing number be X” so you can continue to draft your statements. If you
think that for some reason that an assumption is called for, then also state it
clearly on your exam paper.
2) Conclude whether you think Mary will have a successful career as a
boutique operator.
Mary’s Boutique
#2 Dr Cash 20,000
#3 Dr Purchases 34,600
Cr Cash 330
(business taxes for the year)
Dr Cash 8,900
Cr Sales 57,600
(to record sales for the year)
Cr Cash 10,000
(Another ambiguity of the case….we need to know whether short
or long term for B/S classification…. We assume short term …also
you will lean in Module 7 that the $10,200 market value is
ignored…part of LCM calculation)
20,000 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 6,340
1,400
10.000
480
20,000
28,400
Balance = 7,000 =
bummer…..balance is
supposed to be 7,480
CASH
20,000 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 6,340
1,400
10.000
480
20,000
28,400
20,000 9,200
20,000 12,000
8,900 4,800
43,400 330
10,000 2,950
600 6,340 - 480
1,400
10.000
480
20,000
28,400
Net Income is negative ….. a $9,200 loss…..You can have a loss for a year or
so, but if that is the pattern year after year…then you have a one way ticket to
oblivion
At this point Mary has to sit down and think….how can I raise revenues or cut
costs next year? You raise revenues by either increasing mark-up or by
increasing volume…she needs to rethink her sales strategy
There is one major cost cut she can achieve if she wanted to make the F/S look
good to show to a bank or whoever…don’t take a salary until things improve… if
she can live off personal savings….$12,000 less expense… or go with plan B…
fire the assistant ($9,200) and work long hours herself…this is usually the formula
in a new business…60 hour weeks at minimum wage and forget the
family….having an employee is a luxury Mary can not yet afford
Mary’s
Boutique
Rest
In
Peace