Anya’s Bookstore Part A - Year 1 Of Operations

Anya’s Bookstore Part A - Year 1 of Operations

On 1st January 2015, Anya decided to set up a company which would own and operate an antiquarian bookshop in Houston. She estimated that to put the business on a sound financial footing, she needed $40,000. The following are the details of transactions that took place in 2015:

  1. January 1st: Anya contributed $10,000 and her friend (who is a 50% shareholder along with Anya) contributed $10,000.
  2. January 1st: Borrowed $20,000 from bank @ 15% per annum for 4 years. Interest will be paid at the end of the year. Assume loan will be paid on January 1, 2019.
  3. February 5th: Rented a shop. Rental expenses of $3,000 would be paid in cash on December 31st.
  4. February 11th: Purchased books on credit for $10,000.
  5. March 7th: Sold books originally costing $5,000 for $10,000 cash.
  6. June 12th: Purchased books costing $30,000 on credit.
  7. June 29th: Sold books originally costing $20,000 for $35,000 cash.
  8. October 9th: Paid $25,000 to trade creditors.
  9. December 31st: Paid salary to bookshop manager of $10,000.
  10. December 31st: Paid electricity bill of $2,000.
  11. December 31st: Paid interest on bank loan.

These transactions are to be recorded in the Year 1 worksheet provided, and an income statement and balance sheet are to be prepared based on these records.

Paper For Above instruction

The establishment of Anya’s Bookstore in Houston in 2015 marked the beginning of its financial activities, which include initial capital contributions, borrowing, procurement of inventory, sales, and operating expenses. Accurate recording of these transactions is essential to understanding the company's financial position at year-end and assessing its profitability for Year 1 of operations.

Initial Capital Contributions:

On January 1, 2015, Anya contributed $10,000, and her partner, holding a 50% stake, also contributed $10,000, making the total capital investment of $20,000. These contributions are recorded as owner’s equity, contributing to the company's initial assets. The total initial funds of $40,000 needed for operations, as initially estimated, primarily include this equity and borrowed funds, although the total contributed funds in transactions reach only $20,000, with the remaining possibly sourced through other means or existing cash reserves.

Loan Arrangement:

A significant portion of the funding came from a bank loan of $20,000 at 15% interest per annum, secured on January 1, 2015, with repayment scheduled on January 1, 2019. The interest expense for the year will be calculated as $20,000 × 15% = $3,000. Since interest is paid annually, this amount is recorded as an expense in the income statement for 2015, and accrued interest payable will be included in the liabilities at year-end.

Operational Expenses and Procurement:

The business rented a shop on February 5, 2015, incurring an annual rental expense of $3,000, payable at year-end. This expense is recorded in the income statement for 2015. The business also purchased books on credit amounting to $10,000 on February 11th and further books costing $30,000 on June 12th, also on credit. These inventories contribute to the cost of goods sold and are key to calculating gross profit.

Sales Transactions:

The firm made two significant sales in 2015. On March 7th, books costing $5,000 were sold for $10,000 cash, generating revenue and gross profit. On June 29th, books with a cost of $20,000 were sold for $35,000 cash. These sales impact both the revenue and the inventory accounts, with gross profit being sales revenue minus the cost of goods sold.

Payments and Operating Expenses:

In October, the business paid $25,000 to trade creditors, reducing liabilities. At year-end, salaries of $10,000 and electricity expenses of $2,000 were paid, along with the interest on the bank loan, which amounts to $3,000 based on the loan principal. These expenses are recorded in the income statement, reducing net income.

Financial Statement Preparation:

The income statement summarizes total revenues and expenses, including sales, cost of goods sold, operating expenses, interest expense, and net profit. The balance sheet reflects the assets (cash, inventory, receivables), liabilities (loan, payables), and owner’s equity as of December 31, 2015. Effective recording of all transactions facilitates accurate financial reporting, which is essential for assessing the business’s performance and financial position.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage Learning.
  • Gibson, C. H. (2021). Financial Reporting and Analysis (14th ed.). South-Western College Publishing.
  • Horngren, C. T., Sundem, G. L., & Elliott, J. A. (2018). Introduction to Financial Accounting. Pearson.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2019). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2020). Financial Accounting. Wiley.
  • Simons, R. (2022). Leverage and Liquidity: Financial Strategy. Harvard Business Review.
  • American Institute of CPAs (AICPA). (2020). Statements of Financial Accounting Standards (SFAS).
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  • Skousen, M. (2017). The Naked People Make You Cry. CreateSpace Independent Publishing Platform.
  • Financial Accounting Standards Board (FASB). (2021). Accounting Standards Codification (ASC).

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