Question

The following information is available for two different types of businesses for the 2014 accounting period. Lewis CPAs is a service business that provides accounting services to small businesses. Casual Clothing is a merchandising business that sells sports clothing to college students.
Data for Lewis CPAs:
1. Borrowed $80,000 from the bank to start the business.
2. Provided $60,000 of services to clients and collected $60,000 cash.
3. Paid salary expense of $40,000.
Data for Casual Clothing:
1. Borrowed $80,000 from the bank to start the business.
2. Purchased $50,000 inventory for cash.
3. Inventory costing $32,000 was sold for $60,000 cash.
4. Paid $7,200 cash for operating expenses.
Required:
a-1) Prepare an income statement for each of the companies.
a-2) Prepare a balance sheet for each of the companies.
a-3) Prepare a statement of cash flows for each of the companies. (Amounts to be deducted should be indicated with a minus sign.)
a-4) Prepare an income statement for each of the companies.
a-5) Prepare a balance sheet for each of the companies.
a-6) Prepare a statement of cash flows for each of the companies. (Amounts to be deducted should be indicated with a minus sign.)
b) Which of the two businesses would have product costs?

Answer 1

Answer:

a-1) Lewis CPAs Income Statement:

Service Revenue              $60,000

Salary Expense                -$40,000

Net Income                       $20,000

a-2) Lewis CPAs Balance Sheet:

Cash                                  $100,000

Total Assets                     $100,000

Liabilities + Equity:

Bank Loan                          $80,000

Retained Earnings             $20,000

Total Liabilities + Equity $100,000

a-3) Lewis CPAs Statement of Cash Flows:

Cash from customers                      $60,000

Cash to suppliers of labor              -$40,000

Net Cash from operating activities $20,000

Bank Loan                                        $80,000

Total Cash inflows                          $100,000

a-4) Casual Clothing Income Statement

Sales                   $60,000

Cost of Sales      -$32,000

Gross Profit        $28,000

Operating Exp    -$7,200

Net Income         $20,800

a-5) Casual Clothing Balance Sheet:

Cash                                 $82,800

Inventory                           $18,000

Total Assets                   $100,800

Liabilities + Equity:

Bank Loan                         $80,000

Retained Earnings            $20,800

Total Liabilities + Equity $100,800

a-6) Casual Clothing Statement of Cash Flows:

Cash from customers                    $60,000

Cash to suppliers                          -$50,000

Operating Expenses                       -$7,200

Net Cash from operating activities $2,800

Bank Loan                                      $80,000

Total Cash inflows                         $82,800

b) Casual Clothing has product costs.  While Lewis CPAs has service costs.

Explanation:

a) Revenue from Customers:  Lewis CPAs as a service business does not have sales as revenue from customers.  Its revenue from customers is described as Service Revenue.  For Casual Clothing, its revenue from customers is typically described as Sales.

b) Cost of Goods Sold: Lewis CPAs has cost of goods sold in the form of salaries paid to providers of labor, while Casual Clothing's cost of goods sold is in the form of inventory.   Therefore, there is always inventory either at the beginning or at the ending of the business period.

c) Ending Inventory for Casual Clothing is determined as follows:

Purchase =             $50,000

Cost of Sales =     -$32,000

Ending Inventory = $18,000

d) Cash Balances:

i) Lewis CPAs:

Bank Loan =                    $80,000

Cash from customers =  $60,000

Salary Expense=            -$40,000

Balance =                       $100,000

ii) Casual Clothing:

Bank Loan =                     $80,000

Purchases =                    -$50,000

Cash from customers =  $60,000

Operating Expense=        -$7,200

Balance =                        $82,800

e) The Net Income in each case is treated as Retained Earnings since there are no other charge against it.