Diane Gobin is the founder and manager of Gobin's World. Diane has approached the local bank for a loan to expand her business. As part of the loan application, Diane was asked to prepare Financial Statements for the business. She prepared the following balance sheet and income statement based on the first month of operations (see below).
Gobin's World.
BALANCE SHEET
Decenber 31, 2014
Cash
$ 1,400
Equity
$ 1,400
$ 1,400
$ 1,400
Gobin's World.
INCOME STATEMENT
For the Month Ended, December 31, 2014
Sales
$4,400
Rent
$300
Kiln
4,500
4,800
Net Income
($400)
Diane stated that she was not pleased with the first month's results. But she believes she will show a greater profit next month as she will not have large expenses for items such as purchasing a new Kiln (Oven).
In discussions with Diane and by reviewing the accounting records of Gobin's World, you discover the following facts
Diane opened Gobin's World (a ceramic studio) on December 1st 2014 in leased office space, paying the first month's rent of $300 and a $1,000 security deposit with a check on her personal account.
Gobin' World sells ceramic pieces as well as offers training courses that teach participants how to make their own ceramics pieces.
Diane had been making ceramic pieces as a hobby. She took molds and tools, worth about $7,500, from her home in order to start the studio.
Diane also bought a new firing kiln (oven) to start the business. The new kiln had a list price of $5,000. Diane wrote a check on her personal checking account.
The first customer of Gobin' World paid a total of $1,400 to attend classes for two months. Diane opened a checking account in the company's name with the $1,400.
Gobin's World has conducted classes for one month and has sold some ceramic pieces for $3,000 cash. Cost incurred in making the ceramic pieces was $1,000. Diane paid these cost with her personal credit card.
As the person to decide whether or not to grant Diane the requested loan. You have to decide if Diane prepared the financial statements of Gobin's World correctly. You need to determine if she violated any accepted accounting principles, assumptions or concepts.
Required
a. Based on your review of the above either
i. justify Diane's treatment of each event and her preparation of the financial statements based on your understanding of the generally accepted accounting principles.
ii. or if you do not agree with Diane's treatment then Identify the generally accepted accounting principles, assumptions or concepts that she violated.
b. Based on your answer in (a) above, if necessary, please provide the required corrected Journal Entries based on the additional information given from 1-6 above.
c. Based on your answer in (a) above, if necessary, please prepare a revised Balance Sheet and income Statement for Gobin's World based on GAAP
I need to know how to approach this question.I am lost.