Exercise 3-2 Comparing a merchandising company with a service company The following information is available for two different types of businesses for the 2018 accounting year. Hopkins CPAs is a service business that provides accounting services to small businesses. Sports Clothing is a merchandising business that sells sports clothing to college students. Data for Hopkins CPAS 1. Borrowed $90,000 from the bank to start the business. 2. Provided $60,000 of services to clients and collected $50,000 cash. 3. Paid salary expense of $32,000. Data for Sports Clothing 1. Borrowed $90,000 from the bank to start the business. 2. Purchased $60,000 inventory for cash. 3. Inventory costing $26,000 was sold for $50,000 cash. 4. Paid $8,000 cash for operating expenses. Required a. Prepare an income statement, balance sheet, and statement of cash flows for each of the companies. b. Which of the two businesses would have product costs? Why? c. Why does Hopkins CPAs not compute gross margin on its income statement? d. Compare the assets of both companies. What assets do they have in common? What assets are different? Why? EXERCISE 3-2 Solution EXERCISE 3-2 Solution a. Hopkins CPAS Income Statement For the Year Ended December 31, 2018 Revenue Service Revenue Expenses Salaries Expense Net Income 3-1 EXERCISE 3-2 a. Solution (cont.) Hopkins CPAS Balance Sheet As of December 31, 2018 Assets Cash Accounts Receivable Total Assets Liabilities Notes Payable Total Liabilities Stockholders' Equity Retained Earnings Total Stockholders' Equity Total Liab. and Stockholders' Equity EXERCISE 3-2 a. Solution (cont.) Hopkins CPAS Statement of Cash Flows For Year Ended December 31, 2018 Cash Flows From Operating Activities: Cash Inflow from Clients Cash Outflow for Salaries Net Cash Flow from Operating Activ. Cash Flows From Investing Activities Cash Flows From Financing Activities: Cash Inflow from Loan Net Cash Flow from Financing Activ. Net Increase in Cash Plus: Beginning Cash Balance Ending Cash Balance