KAFFEN COMPANY

Income Statement
For the Six Months Ended April 30, 2014

Revenues
Repair services (Cash $32,150 + Accrued $540) $32,690
Expenses
Salaries and Wages expense (cash $2,600 + accr $420) 3,020
Rent expense (Payment $1,225 Prepaid $175) 1050
Utilities expense 970
Depreciation expense [$9,200 *6/48] 1150
Advertising expense 375 6,565
Profit before tax (PBT) $26,125

Income tax expense 10,000

Net income $16,125

KAFFEN COMPANY
Balance Sheet as on April30, 2014
Assets
Current Assets
Cash $27,780
Accounts receivable 540
Prepaid rent 175
Total current assets $28,495
Property, plant, and equipment
Equipment 9,200
Less: Accumulated
depreciationequipment 1,150 8,050
Total assets $36,545

Liabilities and Stockholders Equity

Current Liabilities
Salaries and wages payable $420
Stockholders equity
Common stock $20,000
Retained earnings 16,125 $36,125
Total stockholders equity
Total liabilities and stockholders equity $36,545
Page 221

YANIK

Sales 90,000
*Sales returns and allowances ($90,000 $84,000) (6,000)
Net sales 84,000
Cost of goods sold (58,000)
*Gross profit 26,000
Operating expenses (14,380)
*Net income 11,620

(b) Yanik

Profit margin $11,620 $84,000 = 14%

Gross profit rate $26,000 $84,000 = 31%

c) Nunez has a higher profit margin than Yanik. Each dollar of net sales by Nunez results in 17 cents of net income co
Nunez also has a higher gross profit rate. For each dollar of Nunezs net sales, 60 cents is required to cover cost of
Yaniks gross profit of .31 indicates that only 31 cents of each dollar of net sales is available to cover other expense
 NUNNEZ

105,000
(5,000)
100,000
60,000
40,000
23,000
17,000

Nunez

$17,000 $100,000 = 17%

$40,000 $100,000 = 40%

esults in 17 cents of net income compared to only 14 cents for Yanik.

0 cents is required to cover cost of goods sold leaving 40 cents to cover other expenses and produce net income.
is available to cover other expenses and produce net income.
Page 222
E5-8, Prepare multiple-step income statement and calculate profitability ratios.
In its income statement for the year ended December 31, 2014, Gavin Company reported the following
condensed data.
Salaries and wages expense $465,000 Loss on disposal of plant assets $83,500
Cost of goods sold 987,000 Sales revenue 2,210,000
Interest expense 71,000 Income tax expense 25,000
Interest revenue 65,000 Sales discounts 160,000
Deprecation expense 310,000 Utilities expense 110,000

Instructions:
(a) Prepare a multiple-step income statement.

GAVIN COMPANY
Income Statement
For the Year Ended December 31, 2014
Sales
Sales revenue $2,210,000
Less: Sales discounts 160,000
Net sales $2,050,000
Cost of goods sold 987,000
Gross profit 1,063,000
Operating expenses
Salaries and wages expense 465,000
Deprecation expense 310,000
Utilities expense 110,000
Total operating expenses 885,000
(Income from operations) Operating Profit 178,000
Other revenues and gains
Interest revenue 65,000
Other expenses and losses
Loss on disposal of plant assets 83,500
EBIT 159,500
Interest expense 71,000
(Income before income taxes ) EBT 88,500
Income tax expense 25,000
Net income or PAT $63,500

(b)(1) Calculate the profit margin ratio and gross profit rate.
Net income $63,500
Profit margin ratio: = = = 3.10%
Net sales $2,050,000

(b)(2) Calculate the profit margin ratio and gross profit rate.
Gross profit $1,063,000
Gross profit rate: = = = 52%
Net sales $2,050,000

(c) In 2013, Gavin had a profit margin ratio of 5%. Is the decline in 2014 a cause for concern? (Ignore income tax eff

During the current year Gavin had a loss on the disposal of property, plant, and equipment of $83,500
This loss is not part of operating income, and it is most likely a non-recurring event, meaning that we wouldnt ex
If we ignore this loss, then Gavin Companys net income would have been $147,000 (63,500+83,500)
Therefore, while the loss is not good news, it is less of a concern than a similar drop in income from operations
 lowing

$83,500
2,210,000
25,000
160,000
110,000

rn? (Ignore income tax effects.)

ment of $83,500
aning that we wouldnt expect it to happen again next year.
63,500+83,500) and its profit margin ratio would have been 7.2% (147,000/2050,000)
income from operations
P5-5A
SUNDBERG COMPANY
Income Statement For the Year Ended December 31, 2014
Sales revenues
Sales revenue $911,000
Less: Sales returns and allowances 28000
Less: Sales discounts 18000
Net sales $865,000
Cost of goods sold 555,000
Gross profit $310,000
Operating expenses
Salaries and wages expense* $136,000
Freight-out 33,000
Rent expense ($24,000 Prepaid $6,000) 18,000
Advertising expense 13,000
Utilities expense 12,000
Depreciation expense 10,000
Total operating expenses $222,000
Operating Profit $88,000
Add: Other revenues and gains
Rent revenue 4,000
EBIT $92,000
Interest expense 2,000
Income before income tax (PBT) $90,000
Income tax expense (25% * 90000) 22,500
Net income (PAT) $67,500

Sales Persons' Salaries 80000

Commision paid 6000
Accrued Commision 3000
Office Salaries 47000
136000
Page 230-231
BYP 5-6 Net Income before changes = 20000
(a) Preparing condensed Income Statement for 2015 assuming
1) Implementation of First set of changes proposed by Sue
MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2015
Net sales [$700,000 *1.04] 728000
Cost of goods sold ($728,000 X 75%)* 546,000
Gross profit ($728,000 X 25%) 182,000
Operating expenses
Selling expenses $100,000
Administrative expenses 20,000
Total operating expenses $120,000
Net income $62,000

*Alternatively:Net sales, $728,000 gross profit of $182,000.

Operating Expense before changes =120000

2) Implementation of Second set of changes proposed by Jeremy
MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2015
Net sales $700,000
Cost of goods sold 560,000
Gross profit 140,000
Operating expenses
Selling expenses Note 1 68000
Administrative expenses 20000 88000
Net income $52,000

Note 1
Operating Expense - Selling 100000
Less: Cut Salaries of 60000 into half 30000
Add: Commision = 2% * Net sales of 700000 14000
Less: Delivery charges = 40000*40% 16000
68000

(b) Recommendation to Sue and Jeremy's proposals:

Sues proposed changes will increase net income by $62,000. Jeremys proposed changes will reduce o
$52,000 and result in a corresponding increase in net income. Thus, if the choice is between Sues plan
plan should be adopted. While Jeremys plan will increase net income, it may also have an adverse effec
Under Jeremys plan, sales personnel will be taking a cut of $16,000 in compensation [$60,000 ($30,

(c) Preparing condensed Income Statement for 2015 assuming

Implementation of Both sets of changes
MEGA MART DEPARTMENT STORE
Projected Income Statement
For the Year Ended December 31, 2013
Net sales [$700,000 *1.04] 728000
Cost of goods sold ($728,000 X 75%) 546,000
Gross profit 182,000
 Operating expenses
Selling expenses (Note 2) 68560
Administrative expenses 20,000
Total operating expenses 88,560
Net income 93,440

If both plans are implemented, net income will be $73,440 higher ($93,440 $20,000) than the 2014 re
This is an increase of over 360%.
Given the size of the increase, Jeremys plan to compensate sales personnel might be modified so that t
For example, if sales commissions were 3%, the compensation cut would be reduced to $8,160 [$60,0

(d) Impact that other factors might have:

Increasing the quantity of inventory purchased will increase warehousing and other costs of inventor
Cutting salespersons salaries and making them more dependent on commissions might actually be
Reduced store deliveries may anger customers, especially if competitors provide more frequent serv
ed changes will reduce operating expenses by
e is between Sues plan and Jeremys plan, Sues
so have an adverse effect on sales personnel.
nsation [$60,000 ($30,000 + $14,000)].

Note 2
Operating Expense 100000
Less: Cut Salaries of 60000 into half 30000
 Add: Commision = 2% * Net sales of 728000 14560
Less: Delivery charges = 40000*40% 16000
68560

20,000) than the 2014 results. 367.2

30,000
ght be modified so that they would not have to take a pay cut. 21,840
educed to $8,160 [$60,000 ($30,000 + ($728,000 X 3%))].

86,160 330.8

other costs of inventory. It will also increase the risk of holding obsolete or out-of-fashion inventory.
ns might actually be viewed favorably by the sales staff if they have the potential to increase their total compensation.
ide more frequent service.
60,000

51,840
8,160
 Particulars Note No. current reporting period
I Revenue From Operations
II Other Income
III Total Income (I+II)
IV EXPENSES
Cost of materials consumed
Purchases of Stock-in-Trade
Changes in inventories of finished goods, Stock-in -Trade and work-in-progress
Employee benefits expense
Finance costs
Depreciation and amortization expense
Other expenses
Total expenses (IV)
V Profit/(loss) before exceptional items and tax (I-IV)
VI Exceptional Items
VII Profit/(loss) before tax (V-VI)
VIII Tax expense:
(1) Current tax
(2) Deferred tax
IX it (Loss) for the period from continuing operations (VII-VIII)
X Profit/(loss) from discontinued operations
XI Tax expense of discontinued operations
XII Profit/(loss) from Discontinued operations (after tax) (X-XI)
XIII Profit/(loss) for the period (IX+XII)
XIV Other Comprehensive Income
A (i) Items that will not be reclassified to profit or loss
(ii) Income tax relating to items that will not be reclassified to profit or loss
B (i) Items that will be reclassified to profit or loss
(ii) Income tax relating to items that will be reclassified to profit or loss
XV Total Comprehensive Income for the period (XIII+XIV) (Comprising Profit (Loss) and Other Comprehensive In

XVI Earnings per equity share (for continuing operation): (1) Basic (2) Diluted
XVII Earnings per equity share (for discontinued operation): (1) Basic (2) Diluted
XVIII Earnings per equity share(for discontinued & continuing operations) (1) Basic (2) Diluted

Other Comprehensive Income shall be classified into-

(A) Items that will not be reclassified to profit or loss
(i) Changes in revaluation surplus;
(ii) Remeasurements of the defined benefit plans;
(iii) Equity Instruments through Other Comprehensive Income;
(iv) Fair value changes relating to own credit risk of financial liabilities designated at fair value through profit or loss;
(v) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent not to be classified into profit or
(vi) Others (specify nature).
(B)Items that will be reclassified to profit or loss;
(i) Exchange differences in translating the financial statements of a foreign operation;
(ii) Debt Instruments through Other Comprehensive Income;
(iii)The effective portion of gains and loss on hedging instruments in a cash flow hedge;
(iv) Share of Other Comprehensive Income in Associates and Joint Ventures, to the extent to be classified into profit or loss
(v) Others (specify nature).
 previous reporting period

Other Comprehensive Income for the period)

hrough profit or loss;

o be classified into profit or loss; and

classified into profit or loss; and

 Liabilities and Shareholders Equity
Sch 1 Share Capital 187.95
Sch 2 Reserves and surplus 6281.54
A Net Worth 6469.49

Sch 3 Secured Loan 509.93

Short
Term,
Less: Cash credit 9.93 Financing
500 Long term financing

Sch 4 Unsecured Loan 13.89

Short
Term,
Less: Due within oneYear 4.65 Financing
9.24 Long term financing

Short Term Financing Liability 498.17

Long Term Financing Laibility 509.24
B Total Borrowings 1007.41

C Sch 5 Quasi Equity - Deferred tax liability 361.53 Long Term Operati

Sch 13 Current Liabilities 2093.96

Less: (Unclaimed dividend, Interest on loan) 34.79 Financing
2059.17 Operating
Sch 14 Provisions 1652.46
Less: Prop dividend , Div tax 448.8 Financing
1203.66 Operating

D Current Operating Liabilities 3262.83

Assets
Sch 6 Net Fixed Assets
Net Block 5082.44
Capital WIP 1562.8
E Total Fixed Assets 6645.24

Sch 7 Investments 1702.67

Long Term Investment
Trade Investment 83.06 Strategic Investments
Subsidiary Companies 308.34 Strategic Investments
Other than trade Investement 3.71 Non-Strategic Investments
Current Investments 1307.56 Non-Strategic Investments
1702.67

Sch 12 Loans and Advances 523.94

Loans and advances to subsidiaries 105.9 Strategic Investments
1725.6 Non-Strategic Investments
 Total Strategic Investments 497.3
Total Non-Strategic Investments 1729.31
F Total Investments 2226.61

Current Assets
Sch 8 Inventories 914.98
Sch 9 Sundry Debtors 178.28
Sch 10 Cash and Bank Balance 1080.03
2173.29
H Sch 11 Other Current assets
Less : Accrued Interest 0 10.98 Financing
Non-Operating
-Discontinued
Fixed asset held for sale 0 45.14 (Investing)
56.12

G Operating Current Assets 2173.29

Net Operating Working Capital

Operating Current Assets 2173.29
Current Operating Liabilities 3262.83
-1089.54

Capital Employed
Sch 1 Share Capital 187.95
Sch 2 Reserves and surplus 6281.54
Net Worth 6469.49
Add: Long Term Financing Liability 509.24 6978.73
DTL - Quasi Equity 361.53
7340.26
Debt to Total assets
Total Borrowings 1007.41
Total Assets 11101.26 9.07

E Total Fixed Assets 6645.24

F Total Investments 2226.61
G Total Operating Current Assets 2173.29
H Other Current Assets 56.12
Total Assets 11101.26

A Net Worth 6469.49

B Total Borrowings 1007.41
C Quasi Equity - Deferred tax liability 361.53
D Current Operating Liabilities 3262.83
Liabilities and Owners' Equity 11101.26 11101.26
ZHOU Co.
Income Statement
For the Month Ended January 31, 2014
Sales
Sales revenue
Less: Sales returns and allowances $20,000
Sales discounts 8,000
Net sales
$370,000

28,000
342,000