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 $120,000borrowed 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.
Impact of net income on a firm’s balance sheet
Conrad Air, Inc., reported net income of $1,365,000 for the year ended December 31, 2009. Show the effect of these funds on the firm’s balance sheet for the previous year (below) in each
of the scenarios following the balance sheet.
Conrad Air, Inc.
Balance Sheet (as of December 31, 2009)
Assets Liabilities and Stockholders’ Equity
Cash $ 120,000 Accounts payable $70,000
Marketable securities 35,000 Short-term notes 55,000
Accounts receivable 45,000 Current liabilities $ 125,000
Inventories 130,000 Long-term debt 55,000
Current assets 330,000 Total liabilities 2,825,000
Equipment $2,970,000 Common stock $ 500,000
Buildings 1,600,000 Retained earnings 1,575,000
Fixed assets 4,457,000 Stockholders’ equity 2,075,000
Total assets $4,900,000 Total liabilities and equity $4,900,000
a. Conrad paid no dividends during the year and invested the funds in marketable
securities.
b. Conrad paid dividends totaling $500,000 and used the balance of the net income
to retire (pay off) long-term debt.
c. Conrad paid dividends totaling $500,000 and invested the balance of the net
income in building a new hangar.
d. Conrad paid out all $1,365,000 as dividends to its stockholders.
Balance sheet preparation
Adam and Arin Adams have collected their personal
asset and liability information and have asked you to put together a balance sheet as
of December 31, 2009. The following information is received from the Adams family.
Cash $ 300 Retirement funds, IRA $ 2,000
Checking 3,000 2008 Sebring 15,000
Savings 1,200 2007 Jeep 8,000
IBM stock 2,000 Money market funds 1,200
Auto loan 8,000 Jewelry & artwork 3,000
Mortgage 100,000 Net worth 76,500
Medical bills payable 250 Household furnishings 4,200
Utility bills payable 150 Credit card balance 2,000
Real estate 150,000 Personal loan 3,000
a. Create a personal balance sheet as of December 31, 2009. It should be similar to
a corporate balance sheet.
b. What must the total assets of the Adams family be equal to by December 31,
2009?
c. What was their net working capital (NWC) for the year? (Hint: NWC is the
difference between total liquid assets and total current liabilities.)