Income statement preparation On December 31, 2015, Cathy Chen, a self-employed c
ID: 2718844 • Letter: I
Question
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 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 2015.
a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2015.
b. Evaluate her 2015 financial performance.
Explanation / Answer
INCOME STATEMENT Income 360000 expenditure Salary (8000*12) 96000 Salary 48000 36000 Employment taxes and benefit costs 34600 Travel 17000 Lease payments (2700*12) 32400 Depreciation 15600 Interest on borrowing 15000 Total Expenditure 294600 Net Profit 65400 Tax@30% 19620 Profit after tax 45780 Financial performance profit% to income= 45780/360000*100 12.72% Inspite of huge income, profit percentage is only 12.7% of income due to heavy operating expenditure of about 81.8%