Accounting question needed help with

Fio Barellis was discussing summer employment with Sara Rida, president of Xanadu Construction Service: Sara: I'm glad diat you're thinking about joining us for the summer. We could certainly use the help. Fio: Sounds good. I enjoy outdoor work, and I could use the money to help with next year's school expenses. Sara: I've got a plan that can help you out on that. As you know, I'll pay you $12 per hour, but in addition, I'd like to pay you with cash. Since you're only working for the summer, it really doesn't make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way. Fio: Well, that's a bit unusual, but I guess money is money. Sara: Yeah, not only that, it's tax-free! Fio: What do you mean? Sara: Didn't you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income-hence, it's the same as tax-free earnings. Please read Activity A8-1 on page 306 in the Instructional Materials. Why does Sara Rida want to conduct business transactions using cash (not check or credit card)? Note: Because a transaction is in cash does not exempt it from income tax. Technically, an employer can pay in cash and still withhold and submit payroll taxes. See the discussion in the OCR Page 281 regarding gross and net payroll. Regardless of the method of payment and the terms of employment, employee or independent contractor, the worker is responsible for reporting the income and paying the tax. Read Sara's second comment....I've got apian...1 do some jobs for mv clients on a strictly cash basis... 1) Where is Sara getting the cash to pay the wage? 2) When Sara performs a service...strictly cash.....and ultimately pays a worker with cash, how are the financial statements reporting the transactions? Please describe the income statement effect as well as the balance sheet reporting. How should Fio respond to Sara's suggestion? Fio Barellis was discussing summer employment with Sara Rida, president of Xanadu Construction Service: Sara: I'm glad diat you're thinking about joining us for the summer. We could certainly use the help. Fio: Sounds good. I enjoy outdoor work, and I could use the money to help with next year's school expenses. Sara: I've got a plan that can help you out on that. As you know, I'll pay you $12 per hour, but in addition, I'd like to pay you with cash. Since you're only working for the summer, it really doesn't make sense for me to go to the trouble of formally putting you on our payroll system. In fact, I do some jobs for my clients on a strictly cash basis, so it would be easy to just pay you that way. Fio: Well, that's a bit unusual, but I guess money is money. Sara: Yeah, not only that, it's tax-free! Fio: What do you mean? Sara: Didn't you know? Any money that you receive in cash is not reported to the IRS on a W-2 form; therefore, the IRS doesn't know about the income-hence, it's the same as tax-free earnings. Please read Activity A8-1 on page 306 in the Instructional Materials. Why does Sara Rida want to conduct business transactions using cash (not check or credit card)? Note: Because a transaction is in cash does not exempt it from income tax. Technically, an employer can pay in cash and still withhold and submit payroll taxes. See the discussion in the OCR Page 281 regarding gross and net payroll. Regardless of the method of payment and the terms of employment, employee or independent contractor, the worker is responsible for reporting the income and paying the tax. Read Sara's second comment....I've got apian...1 do some jobs for mv clients on a strictly cash basis... 1) Where is Sara getting the cash to pay the wage? 2) When Sara performs a service...strictly cash.....and ultimately pays a worker with cash, how are the financial statements reporting the transactions? Please describe the income statement effect as well as the balance sheet reporting. How should Fio respond to Sara's suggestion