Kreative Company is a tax services firm. The firm is located in Chicago and employs ten professionals and five staff. The firm does tax work for small businesses and well-to-do in¬

dividuals. The following data are provided for the year ended July 31, 2001:

Required:
1. Prepare a statement of cost of services sold.
2. Refer to the statement prepared in Requirement 1. What is the dominant cost? Will this always be true of service organizations? If not, provide an example of an exception.
3. Assuming that the average fee for processing a return is $700, prepare an income state¬
ment for Kreative Company.
4. Discuss three differences between services and tangible products. How do these dif¬
ferences affect the computations in Requirement 1?

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Returns processed Returns in process, August 1, 2000 Returns in process, July 31, 2001 Cost of services sold Beginning direct materials inventory Purchases, direct materials 2,000 $ 60,000 100,000 890,000 20,000 40,000