Income Statement – Practice Problem

Problem #1

The following items were taken from the records of Eyring Company for 20X1:
Sales $806,000
Salaries expense 104,000
Prepaid expense 182,000
Cost of goods sold 435,500
Interest revenue 71,500
Interest expense 58,500
Repairs and maintenance expense 70,200
Retained earnings, January 1, 20X1 299,000
Unearned revenue 52,000
Income tax expense 39,000
Dividends declared and paid 130,000

Prepare a multiple-step income statement for 20X1. Note: Not all of the items belong on the income
statement. What is Net Income?
During the year, the company made sales of $140,000 on credit, which have not yet been collected in
cash. Why are these sales included in the 20X1 income statement?
Analysis: Judging from the size of the dividend paid during the year, relative to income for the year, do
you think Eyring Company is an old, established company or a new, start-up company? Explain.
Problem #2

Indicate whether the accounts should be included in the operating section or non-operation section.
Choose the classification that would be typical for most companies.

Account Operating Section Non-Operating Section

Interest expense

Sales revenue

R&D

Dividend income

SG&A expense

COGS

Depreciation

Interest revenue

Gains and losses on asset disposal

Gains and losses on securities

Problem #3

Other comprehensive income is reported separately because the FASB believes these items
A. Are volatile
B. Provide little information about the economic performance of the company’s business operations
C. Arise from changes in market conditions considered to be outside of management’s control
D. All of the above
Problem #4

Use the following information to compute OPERATING INCOME (PROFIT).

Interest Expense $1,500
Sales $14,000
Office Supplies $2,000
Tax Expense $1,960
Depreciation $600
Cost of Goods Sold $5,000

Problem #5

The income statement is also known as all of the following EXCEPT

A. Statement of earnings
B. Statement of comprehensive income
C. Statement of operations
D. Profit and loss statement
 ANSWERS

Problem #1

The following items were taken from the records of Eyring Company for 20X1:
Sales $806,000
Salaries expense 104,000
Prepaid expense 182,000
Cost of goods sold 435,500
Interest revenue 71,500
Interest expense 58,500
Repairs and maintenance expense 70,200
Retained earnings, January 1, 20X1 299,000
Unearned revenue 52,000
Income tax expense 39,000
Dividends declared and paid 130,000

Prepare a multiple-step income statement for 20X1. Note: Not all of the items belong on the income
statement. What is Net Income?
During the year, the company made sales of $140,000 on credit, which have not yet been collected in
cash. Why are these sales included in the 20X1 income statement?
Analysis: Judging from the size of the dividend paid during the year, relative to income for the year, do
you think Eyring Company is an old, established company or a new, start-up company? Explain.

Eyring Company
Income Statement (Multiple-Step Format)
For the Year Ended December 31, 20X1

Sales $806,000
Cost of goods sold 435,500
Gross profit $370,500

Operating expenses:
Salaries expense $104,000
Repairs and maintenance expense 70,200
Total operating expenses 174,200
Operating income $196,300
Other revenue (expenses)
Interest revenue 71,500
Interest expense (58,500) 13,000
Income before taxes $209,300
Income tax expense 39,000
Net income $170,300

All sales during the period, whether or not actually collected in cash, are recognized as revenue.
ANALYSIS: The $130,000 dividend is equal to 76% of net income. New, start-up companies typically
pay a much smaller fraction of income out as dividends. It is likely that Eyring Company is an old,
established company.

Problem #2

Indicate whether the accounts should be included in the operating section or non-operation section.
Choose the classification that would be typical for most companies.

Account Operating Section Non-Operating Section

Interest expense X

Sales revenue X

R&D X

Dividend income X

SG&A expense X

COGS X

Depreciation X

Interest revenue X

Gains and losses on asset disposal X

Gains and losses on securities X

Problem #3

Other comprehensive income is reported separately because the FASB believes these items
A. Are volatile
B. Provide little information about the economic performance of the company’s business operations
C. Arise from changes in market conditions considered to be outside of management’s control
D. All of the above
Problem #4

Use the following information to compute OPERATING INCOME (PROFIT).

Interest Expense $1,500
Sales $14,000
Office Supplies $2,000
Tax Expense $1,960
Depreciation $600
Cost of Goods Sold $5,000

Sales $14,000

Cost of Goods Sold ($5,000)

Gross Profit $9,000

Office Supplies ($2,000)

Depreciation ($600)

Operating Income (Profit) $6,400

Interest Expense $1,500

Earnings before income taxes $4,900

Tax Expense ($1,960)

Net Income $2,940

Problem #5

The income statement is also known as all of the following EXCEPT

A. Statement of earnings
B. Statement of comprehensive income
C. Statement of operations
D. Profit and loss statement