EXHIBIT 2

Income Statement (figures in $ thousands)

The LM Manufacturing Company
For the Year Ending December 31, 2006
Sales
Cost of Goods Sold
Gross Profit on Sales
Operating Expenses:
Marketing Expenses
General and Administrative Expenses
Depreciation
Total Operating Expenses
Operating Income (EBIT)
Interest Expense
Earnings Before tax
Income Tax
Earnings after Tax
Dividends Paid
Change in Retained Earnings

$830
$539
$291
$91
$71
$28
$190
$101
$20
$81
$17
$64
$15
$49

TESTING YOUR UNDERSTANDING

The Income Statement
Given the information below, see if you can construct an income statement. What are the
firms gross profits, operating income, and net income? Which expense is a non-cash
expense? (The solution to this problem is given a few pages later.)
Interest expense
$10,000
Cost of Goods Sold
$160,000
Selling expenses
$70,000
Administrative expenses $50,000

Sales
Stock Dividends
Income Taxes
Depreciation expense

$400,000
$5,000
$20,000
$20,000

The Balance Sheet

While the income statement reports the results from operating the business for a
period of time, such as a year, the balance sheet provides a snapshot in time of the firm's
financial position. Thus, a balance sheet captures the cumulative effect of prior decisions
down to a single point in time.
The relationship between the timing of an income statement and a balance sheet is
represented graphically in Exhibit 3.