Income statement preparation On December 31, 2006, Cathy Chen, a selfemployed certified public accountant (CPA), completed her first full year in business. During the year, she billed $360,000 for her accounting services. She had two employees: a bookkeeper and a clerical assistant. In addition to her monthly salary of $8,000, Ms. Chen paid annual salaries of $48,000 and $36,000 to the bookkeeper and the clerical assistant, respectively. Employment taxes and benefit costs for Ms. Chen and her employees totaled $34,600 for the year. Expenses for office supplies, including postage, totaled $10,400 for the year. In addition, Ms. Chen spent $17,000 during the year on tax-deductible travel and entertainment associated with client visits and new business development. Lease payments for the office space rented (a tax-deductible expense) were $2,700 per month. Depreciation expense on the office furniture and fixtures was $15,600 for the year. During the year, Ms. Chen paid interest of $15,000 on the $120,000 borrowed to start the business. She paid an average tax rate of 30 percent during 2006. a. Prepare an income statement for Cathy Chen, CPA, for the year ended December 31, 2006. b. Evaluate her 2006 financial performance.

(a)

Cathy Chen, CPAIncome Statement

For the Year Ended December 31, 2006Sales revenue $360,000Less: Operating expenses

 Salaries 180,000 Employment taxes and benefits 34,600 Supplies 10,400 Travel & entertainment 17,000 Lease payment 32,400 Depreciation expense 15,600 Total operating expense 290,000

Operating profits $70,000Less: Interest expense 15,000Net profits before taxes $55,000Less: Taxes (30%) 16,500Net profits after taxes $38,500

(b) In her first year of business, Cathy Chen covered all her operating expenses and earned a net profit of $38,500 on revenues of $360,000

Risk and probability Micro-Pub, Inc., is considering the purchase of one of two microfilm cameras, R and S. Both should provide benefits over a 10-year period, and each requires an initial investment of $4,000. Management has constructed the table (at the top of the facing page) of estimates of rates of return and probabilities for pessimistic, most likely,

and optimistic results. a. Determine the range for the rate of return for each of the two cameras. b. Determine the expected value of return for each camera. c. Purchase of which camera is riskier? Why? In Excel Please

(a)Camera Range

R 30% 20% 10%S 35% 15% 20%

(b)Possible

OutcomesProbability

Pri

Expected Returnki

WeightedValue (%)(ki Pri)

Camera R Pessimistic 0.25 20 5.00Most likely 0.50 25 12.50Optimistic 0.25 30 7.50

1.00 Expected Return 25.00

Camera S Pessimistic 0.20 15 3.00Most likely 0.55 25 13.75Optimistic 0.25 35 8.75

1.00 Expected Return 25.50

(c) Camera S is considered more risky than Camera R because it has a much broader range of outcomes. The risk-return trade-off is present because Camera S is more risky and also provides a higher return than Camera R.