Practice Problem Income Statement.pdf

Practice Problem Income Statement.pdf

Single Step: List all revenues and subtotal
List all expenses and subtotal
Total revenues less total expenses = net income
Multi Step: Sales

CGS

Gross Profit

Operating expense

Income from operations

Other revenues and expenses

Income before tax expense

Tax expense

Income from continuing operations

Discontinued operations

Extraordinary items

Net Income

Important: Revenues are recognized when earned
Expenses are recognized when incurred
When cash is paid and received does not matter
This is accrual based accounting and follows the matching principle

Practice Problem 1 – Income Statement – Reporting revenues and expenses
Prepaid Legal, Inc. had the following transactions occur during the month of January:
1) Customers paid the company $600,000 for one year of legal service to be earned equally over the year.
2) Employees worked and the company incurred $20,000 in salaries for the month of January.
3) The company paid $15,000 for salaries to employees during January.
4) The December utility bill of $1,350 was paid in January
5) The January utility bill of $3,000 was received but not paid.
6) The company purchased office furniture for $36,000 in January that is expected to be used for the next 8
years.
7) The company incurred $1,000 of interest expense in January that won’t be paid until March.
8) Liability insurance in the amount of $4,600 to cover the next six months was paid for in January
9) Rent for the first three months of the year was paid in January in the amount of $7,500.
10) Supplies costing $2,000 were purchased in January and supplies costing $300 were used up in January.
Prepare a single step income statement for the month of J anuary using the accrual basis. 110 points)

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