Question

10-Providing Advice - 13 mar t ede y recently graduated from the Atlan Vet Charlottetown, PEI called and urbest Du s her practice has been extremely busy. She is t or tomorrow to discuss whether she is ready to expand c words and prepared her financial statements below the w e rs h h e e o o d est Income Statement of Island Fur B September 10, 2013 Sales revenue Cash $42.000 18.000 Owner's initial investment Total revenue $110.000 Medical supplies expense 3,000 Dividend to Stacey 5.000 Receptionist wages 15.000 Advertising expense 1.500 Utilities expense 1.800 Total expenses $26.300 Net Income $83.700 Balance Sheet of Island Fur Babies Ltd. September 30, 2019 $19,900 12.000 $31.900 Liabilities: Accounts payable Rent expense Total liabilities Assets: Equipment Accounts receivable Medical supplies inventory Total assets Equity: Owners' Equity $30,000 25,000 600 $45,600 $13,700 When you review the financial statements that Stacey has prepared, you realize they contain many errors. All of the dollar amounts contained in Stacey's financial statements are correct except for Owners' Equity. Stacey recorded Owners' Equity at $13,700 to force her balance sheet to 'balance', so you realize you cannot rely on this number. You feel that Stacey should consider expanding only if a) net income for the first six months exceeds $20,000 and b) current assets exceed $45,000. Required: Prepare a corrected income statement and classified balance sheet. After preparing the statements, give Stacey your recommendation as to whether she should expand her veterinary business

Answer 1

a)

Island Fur Babies Ltd
Income Statement for the year ended 30th September 2019
Particulars	Amount
Revenue
Sales Revenue	42,000.00
Less Operating expenses
Medical Operating expenses	3,000.00
Receptionist wages	15,000.00
Advertsing expenses	1,500.00
Utilities expenses	1,800.00
Rent expenses	12,000.00
Operating expenses	33,300.00
Operating profit (EBIT)	8,700.00
Less Interest Expenses	-
Earnings before tax	8,700.00
Less Income Tax expenses	-
Net Income	8,700.00

Island Fur Babies Ltd
Balancesheet as on 30th September 2019
Assets	Amount	Equity & Liabilities	Amount
Cash	$    18,000.00	Accounts Payable	$    19,900.00
Accounts Receivable	$    25,000.00	Capital	$    50,000.00
Supplies - Inventory	$          600.00	Retained Earnings	$      3,700.00
Equipment	$    30,000.00
	$                   -
Total	$ 73,600.00	Total	$    73,600.00

Retained Earnings Account
Particulars	Amount	Particulars	Amount
Dividend Paid	$      5,000.00	By Balance b/d (B/f)	$                   -
		Net Profit - Current year	$      8,700.00
To Balance c/d	$      3,700.00
	$      8,700.00		$      8,700.00

b)

Recommendation: Not to expand the veterinary business. Since net income of veterinary after six month is 8,700.

According to the question she should expand the business if net income more than 20000 and current assets exceed 45000. Here current assets exceeds 45000 but net income equals less than 20,000.