Question

Income statement preparation   On December​ 31,

20192019​,

Cathy​ Chen, a​ self-employed certified public accountant​ (CPA), completed her first full year in business. During the​ year, she charged her clients

$ 366 comma 000$366,000

for her accounting services. She had two​ employees, a bookkeeper and a clerical assistant. In addition to her monthly salary of

$ 8 comma 050$8,050​,

Ms. Chen paid annual salaries of

$ 48 comma 500$48,500

and

$ 35 comma 800$35,800

to the bookkeeper and the clerical​ assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled

$ 34 comma 300$34,300

for the year. Expenses for office​ supplies, including​ postage, totaled  

$ 10 comma 900$10,900

for the year. In​ addition, Ms. Chen spent

$ 17 comma 000$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 tax-deductible​ expense) were

$ 2 comma 730$2,730

per month. Depreciation expense on the office furniture and fixtures was

$ 15 comma 200$15,200

for the year. During the​ year, Ms. Chen paid interest of

$ 14 comma 600$14,600

on the

$ 121 comma 000$121,000

borrowed to start the business. She paid an average tax rate of

30 %30%

during

20192019.

a. Prepare an income statement for Cathy​ Chen, CPA, for the year ended December​ 31,

20192019.

b. Evaluate her

20192019

financial performance.

a. Prepare an income statement for Cathy​ Chen, CPA, for the year ended December​ 31,

20192019.

Complete the fragment of the income statement for Cathy Chen​ below:  ​(Select the correct account from the​ drop-down menu and round to the nearest​ dollar.)

Cathy Chen, CPA
Income Statement
for the Year Ended December 31, 2019
Sales revenue			$	366000

Complete the fragment of the income statement for Cathy Chen​ below:  ​(Select the correct account from the​ drop-down menu and round to the nearest​ dollar.)

Less: Operating expenses
Interest expense	$
Total operating expense			$
Operating profits (EBIT)			$

Complete the fragment of the income statement for Cathy Chen​ below:  ​(Select the correct account from the​ drop-down menu and round to the nearest​ dollar.)

Net profits before taxes			$

Complete the fragment of the income statement for Cathy Chen​ below:  ​(Select the correct account from the​ drop-down menu and round to the nearest​ dollar.)

Net profits after taxes			$

b. Evaluate her

20192019015

financial performance.  ​(Select the best answer​ below.)

A.In her first year of​ business, Cathy Chen covered all her operating expenses and earned a net profit of

$ 60 comma 340$60,340

on revenues of

$ 366 comma 000$366,000.

B.In her first year of​ business, Cathy Chen covered all her operating expenses and earned a net profit of

$ 42 comma 238$42,238

on revenues of

$ 366 comma 000$366,000.

C.In her first year of​ business, Cathy Chen did not cover all her operating​ expenses, which resulted in a net loss of

$ 60 comma 340$60,340

on revenues of

$ 366 comma 000$366,000.

D.In her first year of​ business, Cathy Chen did not cover all her operating​ expenses, which resulted in a net loss of

$ 42 comma 238$42,238

on revenues of

$ 366 comma 000$366,000.

Answer 1

Requirement a: Prepare the income statement as follows

CC, CPA
Income Statement
For the Year Ended December 31, 2019
Particulars	Amount	Amount
Service revenue		$366,000
Deduct: Operating Expenses
Salaries ((8,050 × 12) + 48,500 + 35,800)	$180,900
Employment taxes and benefits	$34,300
Supplies	$10,900
Travel and entertainment	$17,000
Lease payment (2,730 per month × 12 months)	$32,760
Depreciation expense	$15,200
Total operating expenses		$291,060
Operating profit (EBIT)		$74,940
Interest expense		$14,600
Net profits before taxes		$60,340
Taxes ($60,340 × 30%)		$18,102
Net profit		$42,238

Requirement b: The correct option is 'B'. During the first year of operations, the firm earned a net profit of 42,238 and coverd all operating expenses of $291,060 on revenues of $366,000.