Income statement preparation: On December 31, 2015, Cathy Chen, a self-employed certified public...


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

Income Statement
For the Year Ended December 31, 2015
Sales revenue
Operating expenses
Employment taxes and benefits
Travel and Entertainment
Lease payment
Depreciation expense
Operating profits
Less: interest expense
Net profits before taxes
Less: Taxes (30%)
Net profit after taxes

Income Statement

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.

Sales revenue $360,000
Less: operating expenses
Salaries 92,000
Employment taxes and benefits 34,600
Supplies 10,400
Travel & entertainment 17,000
Lease payment 32,400
Depreciation expense 15,600 202,000
Operating profits 158,000
Less: interest expense 15,000
Net profit before taxes 143,000
Less: taxes(30%) 42,900
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.

Answer b

  • 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.

Learn more about this topic:

What Is an Income Statement? - Purpose, Components & Format

from Accounting 101: Financial Accounting

Chapter 2 / Lesson 2

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