A Primary Assumptions Made in Preparing Financial Statements
Response to the following problem:
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 |
$1400 |
|
|
|
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
|
$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.