Problem 1-
A Primary Assumptions Made in Preparing Financial Statements
Millie Abrams opened a ceramic studio in leased retail space, paying the first month's rent of $300 and a $1,000 security deposit with a check on her personal account. She took molds and paint, worth about $7,500, from her home to the studio. She also bought a new firing kiln to start the business. The new kiln had a list price of $5,000, but Millie was able to trade in her old kiln, worth $500 at the time of trade, on the new kiln.
Therefore, she paid only $4,500 cash. She wrote a check on her personal account. Millie's first customers paid a total of $1,400 to attend classes for the next two months. Millie opened a checking account in the company's name with the $1,400. She has conducted classes for one month and has sold $3,000 of unfinished ceramic pieces called greenware. All greenware sales are cash. Millie incurred $1,000 of personal cost in making the greenware. At the end of the first month, Millie prepared the following balance sheet and income statement:
Millie's Ceramic Studio Balance Sheet July 31, 2014
|
Cash
|
$1,400
|
|
|
Kiln
|
5,000
|
Equity
|
$6,400
|
|
Total
|
$6,400
|
Total
|
$6,400
|
Millie's Ceramic Studio Income Statement For the Month Ended July 31, 2014
|
Sales Rent
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$300
|
|
$4,400
|
|
Supplies
|
600
|
|
900
|
|
Net income
|
|
|
$3,500
|
Millie needs to earn at least $3,000 each month for the business to be worth her time. She is pleased with the results.
Required
Identify the assumptions that Millie has violated and explain how each event should have been handled. Prepare a corrected balance sheet