Acc 207 Question #12

1. Acc 207Question #12 By: Arash Foroudi Becky Truax Julio Perez Ken Chen

2. Question #12 Pest Away Corporation was organized by three individuals on Jan. 1, 2006 to provide insect extermination services. At the end of 2006, the following income statement was prepared.

3. Pest Away CorporationIncome StatementFor the year ended Dec. 31, 2006 Revenues Service revenue (cash) $192,000 Service revenue (credit) $24,000 Total Revenues $216,000 Expenses Salaries Expense $76,000 Rent expense 21,000 Utilities Expense 12,000 Advertising Expense 14,000 Supplies Expense 25,000 Interest Expense 8,000 Total expenses 156,000 Pretax income 60,000 Income Tax expense 21,000 Net Income $39,000

4. Question 1&2 • 1. What was the average monthly revenue amount? Answer:$18,000 • 2.What was the monthly rent amount? Answer: $1750

5. Question 3&4 • 3.Explain why supplies are reported as an expense. Answer: Supplies are considered assets until they are used. When they are used to earn revenues during the period, they become an expense; therefore, it is reported as an expense. • 4.Explain why interest is reported as an expense. Answer:Interest is the cost of using borrowed funds, which is used to support a company to earn more revenues; thus, it is also reported as an expense.

6. Question 5&6 • 5.Can you determine how much cash the company had on Dec. 31, 2006? Explain. Answer: The amount of cash cannot be determined by the income statement by itself because the income statement and the retained earnings are put on the balance sheet. The amount of cash that the company had on December 31,2006 can only be determined on the balance sheet and the statement of cash flow. • 6.If the company had a market value of $468,000, what is its price/earnings ratio? Answer: price/earnings ratio= market value/net income 468,000/39,000= 12