Fred Klein started his own business recently. He began by depositing $5,000 of his own money (equity) in a business account. Once he’d done that his balance sheet was as follows:
Assets Liabilities and Equity
Cash $5,000 Equity $5,000
Total Assets $5,000 Total L&E $5,000
During the next month, his first month of business, he completed the following transactions: (All payments were made with checks out of the bank account.)
· Purchased $2,500 worth of inventory, paying $1,500 down and owing the vendor the remainder.
· Used $500 of the inventory in making product
· Paid employees’ wages on the last day of the month of $1,100.
· Sold all the product made in the first month on credit for $3,000.
Paid rent of $1,200.
a. Construct a balance sheet for Fred’s business at the end of its first month.
b. Construct Fred’s income statement
c. Construct Fred’s statement of cash flows for the month
d. Is Fred’s business profitable in an accounting sense? Is a cash flow sense?
e. Can the business fail while making a profit? How might that happen in the next month or so?
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