Financial accounting Recently you were talking to your friend who runs a small online business. She remarked “You’ve studied accounting, haven’t you? I’m wondering if you can help me out. My business is going OK, I think, but I really don’t know for sure. Would you give me some insights?” You replied, “Sure! It’s 15 July, and I remember you told me you started your business on 1 January. Tell me what happened during the six months from 1 January to 30 June” Your friend motioned for you to take a seat. She sighed and said “Well, it’s a long story. On day one I started by contributing $20,000 and borrowing $10,000 from the Singapore Startup Support Society. They’re a good outfit. I don’t need to repay them for 3 years, but I do need to pay $100 per month in interest at the end of each month. I’ve made five payments so far and will make the sixth payment half way through July. “My major setup cost was to have a website developed, an online store. I engaged developers a few days after I took out the loan. They delivered the completed website at the beginning of month 3, and I paid them $15,000 at that time. It’s a good website and I expect to use it for around three years before I’ll need to develop another. I pay $200 per month in web support costs… started that in month 3 “My sales have been quite good, to be honest. I received $13,248 in pay now sales – where customers pay immediately by credit card. These customers all received an 8% discount off the normal price for selecting pay now. I made pay later sales of $24,000 – that’s the invoiced amount. With pay later sales, the customer doesn’t need to pay until I ship the goods and my website automatically dispatches an invoice when this happens. The total cash received from customers since I started up is $32,750. I’m not sure how much customers owe me right now “What else? During month 3 I realized I couldn’t cope with the customer enquiries, so I hired some help starting at the beginning of month 4 and paid $750 at the end of each month to a customer support employee based in the Philippines. Their service is amazing. Just recently they changed their payment terms and now I don’t need to pay them until 2 weeks after the end of the month. So right now, I owe them $750 for month 6. I also paid $800 per month for online advertising commencing in month 5. You know, Facebook ads and stuff like that. I paid in the middle of months 5 and 6 “Stock! Oh, help, stock! I’m afraid it’s a mess. I placed orders for 150 units at $60, of those I returned 20 units because the color was wrong. I got a credit for the return. I then ordered another 200 units at $65 dollars. Around month five I did a mini stock take and discovered I had 15 units on hand. I should have had 20 units on hand… no idea what happened to the missing 5! I ordered a further 100 units at $70 and of those I still have 40 units, and that is the correct quantity. The total amount I paid to my supplier was $22,000 “I think that’s about it. Ummm, well, ok, I did take out $3,000 cash in month 5 to pay for a short-break, but that was just me wanting to take a vacation. Nothing to do with the business.” Finally, your friend fell silent. “I’ve got one question,” you said after a short pause. “How much cash was in the bank at the end of month 6” Your friend logged on to her internet banking service and said “My business account is showing a 30 June balance of $18,350.” REQUIRED: Prepare an income statement, balance sheet and cash-flow statement to help your friend understand her business performance and current position.
