Reference no: EM132519054

At the end of her first year of university, Nola Lam decided she should start a business to help finance her education, so she set up her own courier service. She invested savings of $1,800 in the company, which she called Wroad Wrunner ltd. In addition, her parents lent the company $3,000 to help get it started. Since this was a business venture, Nola insisted on paying interest on this loan, and her parents agreed to charge a rate of 6% per year.

1. Nola then negotiated the purchase of a used car for the business for $8,000. The company made a down payment of $3,000 on the car, and financed the remainder of the purchase price at an interest rate of 9% per year. Due to all the kilometers that would be put on the car while it was used in the courier business Nola estimated the car could be sold at the end of the summer for $6,000.
2. Wroad Wrunner began operations on May 1, and continued until August 31. Although she did not keep any formal accounting records, at the end of the summer Nola put together the following additional information related to the business:
3. During the summer, the company made payments of $623 on the car, which included interest of $123 and principal of $500.
4. No payments (of either interest or principal) were made on the loan from her parents.
5. Nola paid herself a salary of $1,500 per month for the four months the business operated.
6. Payments for the other operating costs (including advertising, insurance, and gas) totalled $9,600. In addition, there were unpaid bills totalling $100 at the end of August.
7. Courier charges collected from customers totalled $19,200. In addition, customers owed $300 for services performed in the last two weeks of august.
8. After the close of business on august 31, there was a balance of $4,694 in the company's bank account, plus a "float" of $83 in the car.

Give a memo that addresses the following;

Question 1: Analyze the transactions that affected the business during the summer. Give a statement of income for Wroad Wrunner for the four-month period ending on August 31, and a statement of financial position on that date.

Question 2: Comment on the profitability of the business during its four-month period of operations. How much did Nola make from her summer venture?

Question 3: Comment on the company's financial position at the end of the summer. If Nola dissolves (shuts down) the business before returning to university, will there be enough cash to pay off the liabilities?

Question 4: Explain both the accrual basis and the cash basis of accounting and indicate why most companies use the accrual basis. Use examples from Nola's business.