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Case study
To begin with we would like to provide some background information about the case
under consideration. Alice Johnson was raised on a farm in Western Queensland. While in
high school, she was an active member of the local rural youth club and raised several prize
animals that sold at auction in state and local shows. She saved her earnings and by the time
she finished high school, Alice had nearly $7,000 in a savings account. She was undecided
whether to go onto tertiary education or use her savings in a business venture. In the end, she
decided to operate a pet grooming shop. However, she wanted to try and decided to use
summer months as a trial period.
During the month of October 2010 Alice located a small building that she could rent for
$200 per month on a short term basis. After transferring $5,000 from her savings account to a
business cheque account in the name of Alice’s Pet Grooming Service, she wrote cheques for
rent (November) and the purchase of grooming equipment and grooming supplies. Although
Alice would not keep a full set of accounting records, she decided to deposit all receipts of
revenue from services performed into the cheque account and to make all payments by
cheque. Alice also kept a daily work book in which she recorded all services performed for
customers.
On 1st November, Alice opened her shop to the public. During the first 3 months she
was unusually busy. Early in February, she needed to make a decision on whether to continue
operating her business or enrol into university studies. To aid her in making this important
decision, Alice reviewed her cheque account and daily work book to determine how well she
had done. The review disclosed the following.
1. Total cash deposited in the account (including the initial $5,000) was $8,920.
2. The daily work book showed that on 31 January 2011 customers owed her $800 for
services performed (accounts receivable) which she expected to collect in February.

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3. Cheques were written for
a. Rent payments totalling $600 for the months of November to January.
b. The purchase of grooming equipment $1,500 (the equipment is treated as an expense,
not an asset), (the equipment actually cost $2,000 and Alice still owed the supplier $500 on
the purchase expected to be paid in February)
c. Grooming supplies, $960. Alice conducted a stock take of grooming supplies and
$260 in value was on hand at 31st January 2011.
d. The payment of electricity bills for the months of November and December $522 (for
both months). She had just received her bill for January for $279 but had not yet paid it.
e. Advertising paid by cheque $216.
f. Withdrawals made by Alice (known as drawings) to pay for personal expenses,
$1,300
First of all, we would like to prepare an income statement for this business. This income
statement is provided in the table below. We would like to add that we did not have a goal to
follow all the accounting and financial standards, while preparing the income statement. Our
goal was simply to analyze financial performance of the business. All the amounts are
provided in the U.S. dollars.
Sales 4 720
Costs of production 3 261
Advertisement cost 216
Rent 600
-Total costs 4 077
Net income 643

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As we can see, Alice has managed to get a positive financial result at the end of period.
It means that the business has created some profits. However, we did not account for the
personal expenses. If had done it – the final financial result would have been negative. On the
other had, it is difficult to account for the personal expenses in business.
Now it is time to prepare a balance sheet. A formal definition of the term “balance
sheet” can be the following.
“Balance sheet is a financial statement that summarizes a company's assets, liabilities
and shareholders' equity at a specific point in time. These three balance sheet segments give
investors an idea as to what the company owns and owes, as well as the amount invested by
the shareholders” (Balance Sheet Definition). The balance sheet for the business under
consideration is provided in the following table.
Current assets:
-Cash and equivalents 8 920
-Accounts receivable 800
Total current assets: 9 720
Total assets: 9 720
Current liabilities:
-Accounts payable 4 720
Total current liabilities: 4 720
Equity 5 000
Total equity: 5 000
After analysis of the company’s financial statements, we have to answer whether
business should go on or not. We believe that it should. Despite the fact, that the overall

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result is probably negative, business has already created the basis of clients, established some
equipment etc. It was only a trial period and it was quite successful we must say.
The next case is the following. Pam Jackson operates the Jackson Dance Studio. On 1st
June of the current year her balance sheet contained the following information.
Current Assets:
Cash $7,800
Acc Receivable $3,500
Prepaid insurance $300
Inventory $460
Total current
Assets $12,060
Current Liabilities:
Notes payable $2,000
Accounts payable $330
Total Current
Liabilities $2,330
Net Assets $9,730
Owners equity:
Capital P Jackson $9,730
Total Owners equity $9,730
First of all, we would like to prepare the income statement and the balance sheet for this
business. However, these financial statements will be prepared for the end of Month, taking
into account all the transactions, provided in the case. The balance sheet is provided in the
table below.

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Current Assets:
Cash $10.810
Acc Receivable $7.300
Prepaid insurance $300
Inventory $610
Total current
Assets $19.020
Current Liabilities:
Notes payable $2,000
Accounts payable $780
Total Current
Liabilities $2,780
Net Assets $16.240
Owners equity:
Capital P Jackson $16.240
Total Owners equity $16.240
The analytical income statement for the business under consideration is provided in the
following table.
Sales $8.900
Expenses $2.290
Net revenues $6.610
Finally, we have to prepare the T-accounts, taking into consideration all the
transactions.

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Assets
Cash
5 100 2 590
Accounts receivable
3 800
Prepaid insurance
50
Inventory
150
Liabilities
Note payable
500
Accounts payable
Equity CR
Capital
Drawings
400
Revenue CR
Revenue fees

7. 7
3 800
Revenue performances
2 500
Expenses DR
Rent expenses
1 140
Suuplie expenses
230
Advertising expense
Misc expense
40
Electricity expense
160
Insurance expense
50

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References
Balance Sheet Definition. Available from:
<http://www.investopedia.com/terms/b/balancesheet.asp>. [10 May 2012]