Question

Problem 3-1 The following information is available for two different types of businesses for the 2018 accounting period. Sanderz CPAs is a service business that provides accounting services to small businesses. Thump is a merchandising business that sells sports clothing to college students. Data for Thump 1. 2. 3. 4. $100,000 from the bank to start the business. Borrowed Purchased $64,000 inventory for cash. Inventory costing $36,800 was sold for $60,000 cash Paid $8,400 cash for operating expenses Data for Sanderz CPAs 1. Borrowed 2. Provided 3. Paid salary expense of $100,000 from the bank to start the business. $70,000 of services to customers and collected $50,000 70,000 cash. REQUIRED a. Prepare an income statement, a balance sheet, and a statement of cash flows for each of the companies. This is different than completing a horizontal model. A horizontal model can help organize the transactions. b. Which of the two businesses would have product costs or cost of goods? Why? c. Why does the CPA firm not compute gross margin on its income statement? d. Compare the assets of both companies. What assets do they have in common? What assets are different? Why?

Answer 1

a	Income Statement
		Sanderz CPAs	Thump
		$	$
	Sales/Service revenue	70,000	60,000
	Less: cost of goods sold	-	(36,800)
	Gross income	-	23,200
	Less: Operating expenses	(50,000)	(8,400)
	Net income	20,000	14,800
	Balance sheet
	Assets;	Sanderz CPAs	Thump
		$	$
	Cash	120,000	87,600
	Inventory	-	27,200
	Total Assets	120,000	114,800
	Owner's equity and liabilities;	Sanderz CPAs	Thump
	Owner's equity ;
	Retained Earnings	20,000	14,800
	Liabilities;
	Bank Loan	100,000	100,000
	Total owner's equity and liabilities	120,000	114,800
	Cash flow statement
		Sanderz CPAs	Thump
		$	$
	Operating activity;
	Inventory purchase	-	(64,000)
	Sales /services	70,000	60,000
	Operating expenses	(50,000)	(8,400)
	Cash from Operating activities ( A)	20,000	(12,400)
	Financing activity;
	Bank Loan (B)	100,000	100,000
	Investing activity   (   C )	-	-
	Net cash flow (A + B + C)	120,000	87,600
b	Thump has product cost since it is a trading business and there is no product cost for Sanderz CPAs because it is a service business.
c	Since all the expenses in service business are operational expenses or indirect expenses. Therefore, gross margin not to be calculated for Sanderz CPAs.
d	In the asset side of both the business, cash is the common asset and inventory is only for Thump.