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. Prepare an income statement for each of the companies.

Answer 1

Answer:

Lewis CPAs:

service revenue:    60,000

Salaries expense:  (40,000)

Net Income             20,000

Casual Clothing:

sales revenue            60,000

cost of goods sold:   (32,000)

Gross Profit                28,000

operating expense     (7,200)

Net Income                20,800

Explanation:

The net income is the difference between the revenues and expenses.

For Casual Clothing we also need to calcualte the gross profit which is, the difference between the sales revenue and the cost of  the good sold.

After that, we subtract the other operating expense to arrive the net income