Income statement preparation On December 31, 2003, Cathy Chen, a selfemployed certified public
accountant (CPA), completed her first full year in business. During the year, she billed $180,000 for her
accounting services. She had two employees: a bookkeeper and a clerical assistant. In addition to her monthly
salary of $4,000, Ms. Chen paid annual salaries of $24,000 and $18,000 to the bookkeeper and the clerical
assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $17,300
for the year. Expenses for office supplies, including postage, totaled $5,200 for the year. In addition, Ms. Chen
spent $8,500 during the year on tax-deductible travel and entertainment associated with client visits and new
business development. Lease payments for the office space rented (a tax-deductible expense) were $1,350 per
month. Depreciation expense on the office furniture and fixtures was $7,800 for the year. During the year, Ms.
Chen paid interest of $7,500 on the $60,000 borrowed to start the business. She paid an average tax rate of 30
percent during 2003.
a. Prepare an income statement for Cathy Chen, CPA, for the year ended
December 31, 2003.
b. Evaluate her 2003 financial performance.
Answer: a)
Cathy Chen, CPA
Income Statement
For the Year Ended December 31, 2016
Particulars
Amount ($)
Sales Revenue
Less: Operating Expenses
Salaries*
Employment Taxes & Benefits
Supplies
Travel & entertainment
Lease Payment**
Depreciation
Total Operating Expense
Operating Profits (EBIT)
Less: Interest Expense
Net Profit Before Taxes (EBT)
Less: Taxes (30%)
Net Profit After Taxes
Amount ($)
180,000
(90,000)
(17,300)
(5,200)
(8,500)
(16,200)
(7,800)
(145,000)
35,000
(7,500)
27,500
(8250)
19,250
b) She covered all her operating expenses and earned a net profit of $19,250.
ZERIN TASNIME, LECTURER, BSMRSTU
1
Balance sheet preparation Use the appropriate items from the following list to
prepare in good form Owen Davis Company’s balance sheet at December 31,
2003.
Answer:
Owen Davis Company
Balance Sheet
For the Year Ended December 31, 2006
Particulars
Assets
Current Assets
Cash
Marketable Securities
Accounts Receivable
Inventories
Total Current Assets
Gross Fixed Assets
Land & Buildings
Machinery & Equipment
Furniture & Fixtures
Vehicles
Total Gross Fixed Assets
Less: Accumulated Depreciation
Net Fixed Assets
Total Assets
Liabilities & Owner's Equity
Current Liabilities
Accounts Payable
Notes Payable
Accruals
Total Current Liabilities
Long Term Debt
Total Liabilities
Stockholders' Equity
Preferred Stock
Common Stock (at par)
Paid-in capital in excess of par
Retained Earnings
Total Stockholders' Equity
Total Liabilities & Stockholder's Equity
Amount ($)
Amount ($)
215,000
75,000
450,000
375,000
1,115,000
325,000
560,000
170,000
25,000
1,080,000
(265,000)
815,000
1,930,000
220,000
475,000
55,000
750,000
420,000
1,170,000
100,000
90,000
360,000
210,000
760,000
1,930,000
ZERIN TASNIME, LECTURER, BSMRSTU
2
Cash Flow Statement Preparation
ZERIN TASNIME, LECTURER, BSMRSTU
3
Retained Earnings Statement Preparation
ZERIN TASNIME, LECTURER, BSMRSTU
4
Financial Statement Account Identification:
Mark each of the accounts listed in the following table as follows:
a. In column (1), indicate in which statement—income statement (IS) or balance
sheet (BS)—the account belongs.
b. In column (2), indicate whether the account is a current asset (CA), current
liability (CL), expense (E), fixed asset (FA), long-term debt (LTD), revenue (R), or
stockholders’ equity (SE).
ZERIN TASNIME, LECTURER, BSMRSTU
5
Financial Statement Account Identification
Accumulated Depreciation:
* This is really not a fixed asset, but a charge against a fixed asset, better known as a contra-asset.
ZERIN TASNIME, LECTURER, BSMRSTU
6