
Concept explainers
a.
Prepare an income statement,
a.

Explanation of Solution
Income statement: This statement reports revenues and expenses from business operations and the result of those operations as net income or net loss. Net income is the positive difference between revenues and expenses. If the difference between revenues and expenses is negative, it results in net loss.
Prepare income statement for L CPAs:
L CPAs | |
Income Statement | |
For the Year Ended December 31, 2018 | |
Particulars | Amount |
Revenue | |
Service Revenue | $60,000 |
Expenses | |
Salaries Expense | ($40,000) |
Net Income | $20,000 |
Table (1)
Prepare income statement for C Clothing:
C Clothing | |
Income Statement | |
For the Year Ended December 31, 2018 | |
Particulars | Amount |
Net Sales Revenue | $60,000 |
Less: Cost of goods sold | ($32,000) |
Gross margin | $28,000 |
Expenses: | |
Operating expenses | ($7,200) |
Net Income | $20,800 |
Table (2)
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and stockholders (
Prepare balance sheet for L CPAs:
L CPAs | ||
Balance Sheet | ||
As of December 31, 2018 | ||
Assets | ||
Cash (1) | $100,000 | |
Total Assets | $100,000 | |
Liabilities | ||
Notes Payable | $80,000 | |
Total Liabilities | $80,000 | |
Stockholders’ Equity | ||
$20,000 | ||
Total Stockholders’ Equity | $20,000 | |
Total Liabilities and Stockholders’ Equity | $100,000 |
Table (3)
Prepare balance sheet for C Clothing:
C Clothing | ||
Balance Sheet | ||
As of December 31, 2018 | ||
Assets | ||
Cash (2) | $82,800 | |
Merchandised Inventory (1) | $18,000 | |
Total Assets | $100,800 | |
Liabilities | ||
Notes Payable | $80,000 | |
Total Liabilities | $80,000 | |
Stockholders’ Equity | ||
Retained Earnings | $20,800 | |
Total Stockholders’ Equity | $20,800 | |
Total Liabilities and Stockholders’ Equity | $100,800 |
Table (4)
Working note:
(1) Calculate the amount of cash account for L CPAs:
(2) Calculate the amount of cash account for C Clothing:
(3) Calculate the amount of merchandised account for C Clothing:
Statement of cash flows: Statement of cash flows reports all the cash transactions which are responsible for inflow and outflow of cash and result of these transactions is reported as ending balance of cash at the end of reported period. Statement of cash flows includes the changes in cash balance due to operating, investing, and financing activities.
Prepare statement of cash flows for L CPAs:
L CPAs | ||
Statement of Cash Flows | ||
For Year Ended December 31, 2018 | ||
Cash Flows From Operating Activities: | ||
$60,000 | ||
($40,000) | ||
Net Cash Flow from Operating Activities | $20,000 | |
Cash Flows From Investing Activities | $0 | |
Cash Flows From Financing Activities: | ||
Cash Inflow from Loan | $80,000 | |
Net Cash Flow from Financing Activities | $80,000 | |
Net Increase in Cash | $100,000 | |
Add: Beginning Cash Balance | $0 | |
Ending Cash Balance | $100,000 |
Table (5)
Prepare statement of cash flows for C Clothing:
C Clothing | ||
Statement of Cash Flows | ||
For Year Ended December 31, 2018 | ||
Cash Flows From Operating Activities: | ||
Cash Inflow from Customers | $60,000 | |
Cash Outflow for Inventory | ($50,000) | |
Cash Outflow for Expenses | ($7,200) | |
Net Cash Used for Operating Activities | $2,800 | |
Cash Flows From Investing Activities | $0 | |
Cash Flows From Financing Activities: | ||
Cash Inflow from Loan | $80,000 | |
Net Cash Flow from Financing Activities | $80,000 | |
Net Increase in Cash | $82,800 | |
Add: Beginning Cash Balance | $0 | |
Ending Cash Balance | $82,800 |
Table (6)
b.
Determine which business have product cost.
b.

Explanation of Solution
Product costs: The costs are incurred to acquire the merchandise, ship the stock, prepare the merchandise for sale, and store the inventory are collectively referred to as product costs or inventory costs.
C Clothing business is considered as a merchandising business because it has inventory and the goods are sold. Hence, C Clothing business has product cost. However, L CPAs is a service oriented business and that firm does not have product costs.
c.
Determine the why L CPAs does not compute gross margin on its income statement.
c.

Explanation of Solution
L CPAs is a service oriented business and that firm does not have product costs. Hence, L CPAs does not require computing gross margin on its income statement. However, it only has selling and administrative expense (period cost).
d.
Compare the assets of both the companies and explain the common assets and different asset of both the companies.
d.

Explanation of Solution
Comparison of the common assets and different asset of given the companies:
- • The common asset for both companies is Cash.
- • Cash is the only asset that L CPAs hold it.
- • C Clothing has cash plus inventory as an asset.
- • L CPAs does not having any inventory and does not sell.
- • C Clothing sells products and must carry inventory available for sale to customers.
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Chapter 3 Solutions
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