Income statement preparation On December 31, 2009, Cathy Chen, a self-employed c

ID: 2672405 • Letter: I

Question

Income statement preparation On December 31, 2009, 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 tax- deductible 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 2009.
a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2009.
b. Evaluate her 2009 financial performance.

Explanation / Answer

Income Statement

Sales revenue

$360,000

Less:Operating expenses

Salaries

180,000

Employment taxes and benefits

34,600

Supplies

10,400

Travel & entertainment

17,000

Lease payment

32,400

Depreciation expense

15,600

Total operating expense

290,000

Operating profits

$70,000

Less:Interest expense

15,000

Net profits before taxes

$55,000

Less:Taxes (30%)

16,500

Net profits after taxes

$38,500

(b) Cathy Chen covered all her operating expenses and earned a net profit of $38,500 on revenues of $360,000

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