Comparing a merchandising company with a service company
The following information is available for two different types of businesses for the 2011 accounting period. Eady CPAs is a service business that provides accounting services to small businesses. Campus Clothing is a merchandising business that sells sports clothing to college students.
Data for Eady CPAs
1. Borrowed $40,000 from the bank to start the business.
2. Provided $30,000 of services to customers and collected $30,000 cash.
3. Paid salary expense of $20,000.
Data for Campus Clothing
1. Borrowed $40,000 from the bank to start the business.
2. Purchased $25,000 inventory for cash.
3. Inventory costing $16,400 was sold for $30,000 cash.
4. Paid $3,600 cash for operating expenses.
Required
a. Prepare an income statement, balance sheet, and statement of cash flows for each of the companies.
b. Which of the two businesses would have product costs? Why?
c. Why does Eady CPAs 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?
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