Stephen Anest Started A New Business Called Repairs R Us Inc

Stephen Aneststarted A New Business Called Repairs R Us Inc At The

Stephen Anest started a new business called "Repairs R Us, Inc." at the beginning of the year. He has not maintained formal accounting records, except for tracking all cash receipts and disbursements. All unpaid invoices are kept in a file until paid. Anest requested the preparation of an accrual basis income statement for the year, using the following information:

The equipment has a useful life of ten years, supplies on hand at year-end have a cost of $3,000, shop rent is $500 per month with two months paid in advance, the insurance is a two-year policy paid at the beginning of the year, customers owe $3,200 for services already performed, and workers are owed $550 at the end of the year for work done in December.

Paper For Above instruction

Introduction

Financial statements are essential tools for understanding a company's financial health and operational performance. When preparing financial statements on an accrual basis, revenues are recognized when earned, and expenses are recognized when incurred, regardless of cash flow. Given the limited records maintained by Stephen Anest for Repairs R Us, Inc., this analysis will focus on adjusting for the accrued, deferred, and unrecorded transactions to produce an accurate income statement for the year.

Adjustments and Calculations

To prepare the accrual basis income statement, several adjustments are necessary based on the provided information. These adjustments include depreciation, recognition of prepaid expenses, accrued expenses, revenue earned but not yet received, and unbilled services rendered. Below is a detailed explanation of each adjustment:

1. Equipment Depreciation

The equipment has a useful life of ten years. Assuming the equipment’s original cost was provided, or for illustrative purposes, an estimated cost can be used. However, since the original cost isn't specified in the prompt, we will assume a typical scenario where equipment purchased at the beginning of the year with an estimated cost of $10,000 is being depreciated annually. Depreciation expense = Cost / Useful life = $10,000 / 10 = $1,000 per year.

2. Supplies Expense

Supplies on hand at year-end are valued at $3,000. If supplies purchased during the year exceeded this amount, the difference would be the supplies used. Without initial supplies inventory or purchases, we accept the $3,000 value as the remaining supplies and assume supplies expense equals supplies purchased minus ending supplies. If starting supplies were zero, supplies expense is the amount purchased during the year minus ending supplies, but lacking purchase data, the supplies used are approximated as the supplies on hand at year-end, indicating the supplies used during the year is the total supplies purchased minus $3,000. In the absence of that detail, the supplies expense can be approximated as the supplies used to maintain ending inventory, which is $3,000.

3. Rent Expense

Rent is $500 per month, with two months paid in advance. Since rent is paid two months in advance, the prepayment covers two months, and only the rent expense incurred during the year needs recognition. For a full year, the rent expense equals 12 months at $500/month = $6,000. However, since two months are prepaid, the remaining unexpired prepaid rent at year-end is 2 months x $500 = $1,000. Therefore, rent expense for the year is $6,000 - $1,000 = $5,000.

4. Insurance Expense

Insurance was paid at the beginning of the year for a two-year policy. Total cost of the insurance policy is thus spread over two years: total cost divided by 2. If the total premium paid at the start was for, for example, $2,400, then the yearly insurance expense is $1,200. Since the entire premium is paid and the policy covers two years, the insurance expense for the year is $1,200. If the actual premium paid is unknown, similar assumptions apply.

5. Accounts Receivable

Customers owe $3,200 for services already performed but not yet received. Under accrual accounting, revenue is recognized when services are performed. Therefore, $3,200 of uncollected but earned revenue should be included in the income statement as revenue.

6. Accrued Wages

Workers are owed $550 at year-end for work completed in December, which has not yet been paid. This amount should be recognized as wages expense and wages payable in the liabilities section.

Income Statement Preparation

Using the above adjustments, the estimated accrual income statement can be constructed. For the purpose of this exercise, assumptions regarding the original cost of equipment and purchasing details have been made where data was insufficient. The core revenues and expenses are summarized below:

• Revenues: Service revenue of $3,200 (earned but uncollected).
• Expenses: Depreciation expense ($1,000), supplies expense ($3,000), rent expense ($5,000), insurance expense ($1,200), wages expense ($550).

Calculation of Net Income

Sum of expenses: $1,000 + $3,000 + $5,000 + $1,200 + $550 = $10,750

Net income: Revenue ($3,200) minus total expenses ($10,750) equals a net loss of $7,550. This indicates the business operated at a loss for the year based on assumed figures; actual results may vary with precise data.

Conclusion

Preparing an accrual basis income statement for Repairs R Us, Inc., requires careful consideration of depreciation, prepaid expenses, accrued liabilities, and unrecorded revenues. The above analysis demonstrates how to adjust cash-based records into an accurate financial picture. The net loss indicates that the business needs to focus on increasing revenues or controlling expenses to improve profitability. Accurate record-keeping and detailed tracking of all transactions in future periods will facilitate more precise financial reporting and better decision-making.

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