Income statement preparation:
On December 31, 2015, Cathy Chen, a self-employed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees, a bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $34,600 for the year. Expenses for office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 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 taxdeductible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid interest of $15,000 on the $120,000 borrowed to start the business. She paid an average tax rate of 30% during 2015.
a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2015.
b. Evaluate her 2015 financial performance. |Cathy Chen, CPA
|For the Year Ended December 31, 2015|
|Employment taxes and benefits|
|Travel and Entertainment|
|Less: interest expense|
|Net profits before taxes|
|Less: Taxes (30%)|
|Net profit after taxes|
Income statement gives a summary of the activities of a firm, by disclosing the revenues earned and the expenses incurred for a period, and the resultant profit or loss. In other words, it reports the financial performance of a firm during a period.
Answer and Explanation:
Answer a Income statement is given below.
|Less: operating expenses|
|Employment taxes and benefits||34,600|
|Travel & entertainment||17,000|
|Less: interest expense||15,000|
|Net profit before taxes||143,000|
|Net profit after taxes||$100,100|
- Total salaries = 8,000 + 48,000 + 36,000 = $92,000
- Annual lease rent = 2,700 * 12 = 32,400
- Total operating expenses are equal to 202,000.
- Cathy has made a net profit of $100,100 in the first year of business.
- The profit margin ratio, that is ( Profit / sales ), works out to 100,100 / 360,000 = 27.81%
Her financial performance in the first year has been good.
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from Accounting 101: Financial AccountingChapter 2 / Lesson 2