The Java Specialty Shoppe

The Java Specialty Shoppe

Mr. Davis formed the Java Specialty Shoppe in August of last year to sell specialty products associated with coffee and tea drinkers. Mr. Davis invested $11,000 of his own money to start the company. For the first five months Mr. Davis ran the business as a mail order company out of his home while still working full-time as a salesman for the food service division of a major food manufacturer.

On January 1st of the following year he moved the business into a small store in a shopping mall. While Mr. Davis was reasonably confident that the store would be successful, he decided to keep his full-time position with the food manufacturer for the time being and hire full and part-time staff to run the new store.

The Balance Sheet for the company as at December 31st, last year is shown below.

The Java Specialty Shoppe

Balance Sheet

December 31

ASSETS

Current Assets

Cash $ 2,000

Accounts Receivable 1,200

Merchandise Inventory 4,000

Supplies Inventory 300

Total Current Assets 7,500

Long Term Assets

Delivery Truck 4,800

Less: Accumulated Amortization (500) 4,300

TOTAL ASSETS $11,800

LIABILITIES & OWNER'S EQUITY

Current Liabilities

Accounts Payable $ 225

Salary Payable 300

Total Current Liabilities 525

Owner's Equity

J. Davis, Capital 11,275

TOTAL LIABILITIES & OWNER'S EQUITY $11,800

Mr. Davis had never been very good at record keeping. However, from his experience with the food manufacturer, he knew the importance of frequently measuring the profitability of his company. Mr. Davis had been so busy with the move into the new location that his record keeping suffered even more. When he went to visit his accountant just after the end of January to have her prepare the financial statements for The Java Specialty Shoppe for the month of January, all he had was a shoebox containing a lot of receipts, cheque stubs, documents as well as scribbled notes to himself and from others.

Mr. Davis and his accountant sat down and went through the shoebox and the result of this conversation about its contents is summarized in her notes below:

1. The shoebox contained a two-year property insurance policy for the new store with coverage starting January 1. Attached to the policy was a note saying the policy had been paid for with company cheque # 245 for $312.

2. A copy of the lease for the new space in the shopping mall showed it was for a term of two years beginning January 1 at a cost of $225 per month. Consistent with the terms of the lease, both the first and last month's rent had been paid by cheque although Mr. Davis couldn't remember the cheque #.

3. A receipt from David's Moving for $100 for moving the merchandise inventory from Mr. Davis's home to the new store was dated January 2nd and marked "Paid in Full".

4. An invoice from one of Java Specialty Shoppe's suppliers, Roaster's Supply Limited, was dated January 1st. The invoice indicated it was for $5,000 of merchandise. In the bottom left corner of the invoice it read: "Terms of Sale - 1/10, n/30, FOB Our Plant".

5. Attached to the invoice from Roaster's Supply Limited was a hand written receipt from Ace Delivery for $50, marked "PAID-Jan 2" and the following description: "Delivery of goods from Roaster's Supply to Java Specialty Shoppe".

6. An invoice from Choice Office Supplies dated January 2 for some office furniture and store and shelving equipment. The total cost was $6,000. From this amount, on the face of the invoice were the following notes: $2,000 paid on delivery: balance to be paid in 20 equal, monthly installments, without interest, beginning February 1. Mr. Davis and his Accountant had chatted briefly about how long this furniture and equipment might last and agreed that 10 years was a reasonable estimate.

7. A copy of the promissory note dated January 2, to the City Bank that Mr. Davis had signed for a loan to Java Specialty Shoppe