Problem 31 The following information is available for two di

Problem 3-1 The following information is available for two different types of businesses for the 2016 accounting period. Earl CPAs is a service business that provides accounting services to small businesses. Griffin is a merchandising business that sells sports clothing to college students. Data for Earl CPAS 2. Provided 3. Paid salary expense of $225,000 from the bank to start the business $157,500 of services to customers and collected $112,500 $157,500 cash. Data for Griffin Borrowed Purchased $225,000 from the bank to start the business $144,000 inventory for cash 2. 3. Inventory costing $82,800 was sold f cash. Paid $18,900 cash for operating expenses. 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 transaction b. Which of the two businesses would have product costs or cost of goods? Why? c. Why does Earl 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?

Solution

(a)

INCOME STATEMENT OF EARL CPA

Balance Sheet Of EARL CPA

CASH FLOW STATEMENT OF EARL CPA

INCOME STATEMENT OF GRIFFIN

Balance Sheet Of GRIFFIN

CASH FLOW STATEMENT OF GRIFFIN

$135000

(b) Griffin has the product cost beacuse it deal with the product whereas the Earl CPA is service sector unit hence they do not have the product cost.

(c) Earl CPA does not have any opearting expence hence they cannot compute gross margin on its income statement.

(d) Both the Comapany have Cash as their assets in their Balance sheet and Griffin has Closing Inventory in its Assets in Balance sheet because Griffin is dealing in Goods.

Particulars	Amount
Income From Service Performed	$ 157500
Less : Salery Paid	$ 112500
Net Income OF CPA	$ 45000