Copyright © 2011 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 6/e, Continuing Cookie Chronicles (For Instructor Use Only) 1

CCC1 CONTINUING COOKIE CHRONICLE

(a) Natalie has a choice between a sole proprietorship and a corporation. Apartnership is not an option since she is the sole owner of the business.

A proprietorship is easier to create and operate because there are noformal procedures involved in creating the proprietorship. However, ifshe operates the business as a proprietorship she will personally haveunlimited liability for the debts of the business. Operating the businessas a corporation would limit her liability to her investment in the business.Natalie will in all likelihood require the services of a lawyer to incorporate.Costs to incorporate as well as additional ongoing costs to administrateand operate the business as a corporation may be costly. Also, her taxeswould be higher if she incorporates.

(b) Yes, Natalie will need accounting information to help her operate herbusiness. She will need information concerning her cash balance on adaily or weekly basis to help her determine if she can pay her bills. Shewill need to know the cost of her services so she can establish herprices. She will need to know revenue and expenses so she can reporther net income for personal income tax purposes, on an annual basis.If she borrows money, she will need financial statements so lenderscan assess the liquidity, solvency, and profitability of the business.Natalie would also find financial statements useful to better understandher business and identify any financial issues as early as possible.Monthly financial statements would be best because they are moretimely, but they are also more work to prepare.

(c) Assets: Cash, Accounts Receivable, Supplies, Equipment, PrepaidInsurance

Liabilities: Accounts Payable, Unearned Revenue, Notes Payable

Revenue: Teaching Revenue

Expenses: Advertising Expense, Supplies Expense, Travel Expense,Telephone Expense, Insurance Expense

2 Copyright © 2011 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 6/e, Continuing Cookie Chronicles (For Instructor Use Only)

CONTINUING COOKIE CHRONICLE (Continued)

(d) Natalie should have a separate bank account. This will make it easier toprepare financial statements for her business. The business is aseparate entity from Natalie and must be accounted for separately.

(e) I recommend that Natalie keep the car as a personal asset and pay forall costs personally. She should keep track of how many miles shedrives for business purposes versus personal use and determine thepercentage of business use versus personal use. She should keeptrack of all costs of owning and operating her car including such thingsas fuel, insurance, registration, and repairs and maintenance. Then shecan multiply the percentage of business use by the total cost of owningand operating her car to calculate the amount of expense the businesscan record for travel.

The business will record this as an expense. Natalie can either reim-burse herself for these business expenses by taking cash out of thebusiness to pay for these costs or she can treat it as an investment inthe business.

[Note to instructors: This last question is fairly complex and there areincome tax considerations. This suggested solution does not cover allof the issues that should be considered. The intent is just to ensurestudents begin to think about how to deal with a fairly common issuefor self-employed people.]