Fred Klein began his own business recently. He starts by depositing $5,000 of his own money (equity) in a business account. Once he had done that his balance sheet was as shown:
Assets Liabilities and Equity
Cash $5,000 Equity $5,000
Total Assets $5,000 Total L&E $5,000
Throughout the next month, his first month of business, he completed the given transactions: (All payments were made with checks out of the bank account.)
a) Purchased $2,500 worth of inventory, paying $1,500 down and owing the vendor the remainder.
b) Utilized $500 of the inventory in making product.
c) Paid employee's wages on the last day of the month of $1,100.
d) Sold the entire product made in the first month on credit for $3,000.
Paid rent of $1,200.
1. Prepare a balance sheet for Fred's business at the end of its first month.
2. Prepare Fred's income statement.
3. Prepare Fred's statement of cash flows for the month.
4. Is Fred's business profitable in an accounting sense? Is a cash flow sense?
5. Can the business fail as making a profit? How might that occur in the next month or so?