/Financial Accounting and Reporting
Lecture 1 Assignment
Group 1A
Student Name: Ahmed Salah Arabi
E1-6
Analyzing Revenue and Expenses and Preparing an Income Statement
Assume that you are the owner of Campus Connection, which specializes in items that interest students.
At the end of January 2014, you find (for January only) this information:
a. Sales, per the cash register tapes, of $150,000, plus one sale on credit (a special situation) of $2,500.
b. With the help of a friend (who majored in accounting), you determine that all of the goods sold during
January cost $70,000 to purchase.
c. During the month, according to the checkbook, you paid $37,000 for salaries, rent, supplies, advertising,
and other expenses; however, you have not paid the $900 monthly utilities for January on the store and
fixtures.
Required:
On the basis of the data given (disregard income taxes), what was the amount of net income for January?
Show computations. (Hint: A convenient form to use has the following major side cations: Revenue from
Sales, Expenses, and the difference---Net Income.)
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Solution:
January Net Income = Revenue from sales – Expenses = (150,000 + 2,500) – (70,000 + 37,000 + 900) =
152,500 – 107,900 = 44,600
E1-7
Preparing an Income Statement and Inferring Missing Values
Walgreen Co. is one of the nation’s leading drugstore chains. Its recent income statement contained the
following items (in millions). Prepare an income statement for the year ended August 31, 2011. (Hint: First
order the items as they would appear on the income statement and then confirm the values of the subtotals
and totals. Exhibit 1.3 in the chapter provides a good model for completing this exercise.)
Cost of sales
Provision for income taxes
Interest expense
Net earnings
Net sales
Pretax income
Selling, general, and administration expense
Other income
Total expenses
Total revenues/income
51,692
1,580
71
2,714
72,184
4,294
16,561
434
68,324
72,618
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Solution:
Walgreen Co.
Income Statement
For the year ended August 31, 2011
Net Sales
Cost of sales
Gross Profit
Operating Expenses:
Selling, general, and administration expense
Operating Income
Non-operating revenue and gains:
Other income
Non-operating expenses and losses:
Interest expense
Pretax income
Provision for income taxes
Net Income
72,184
(51,692)
20,492
16,561
(16,561)
3,931
434
(71)
(363)
4,294
(1,580)
2,714
E1-8
Analyzing Revenues and Expenses and Completing an Income Statement
Neighborhood Realty, Incorporated, has been operating for three years and is owned by three investors.
S. Bhojraj owns 60 percent of the total outstanding stock of 9,000 shares and is the managing executive in
charge. On December 31, 2015, the following financial items for the entire year were determined:
commissions earned and collected in cash, $150,900, plus $16,800 uncollected; rental services fees earned
and collected, $20,000; salaries expenses paid, $62,740; commissions expense paid, $35,330; payroll taxes
paid, $2,500; rent paid, $2,475 (not including December rent yet to be paid); utilities expense paid, $1,600;
promotion and advertising paid, $7,750; income taxes paid, $24,400; and miscellaneous expenses paid, $500.
There were no other unpaid expenses at December 31. Also, during the year, the company paid the owners
“out-of-profit” cash dividends amounting to $12,000. Complete the following income statement:
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Solution:
Neighborhood Realty Inc.
Income Statement
For the year ended December 31, 2015
Revenues
Commissions earned
Rental service fees
Total revenues
Expenses
Salaries expenses
Commission expenses
Payroll tax expense
Rent expense
Utilities expense
Promotion and advertising expense
Miscellaneous expenses
Total expenses (excluding income taxes)
Prertax income
Income tax expense
Net income
167,700
20,000
187,700
62,740
35,330
2,500
2,700
1,600
7,750
500
(113,120)
74,580
(24,400)
50,180
Note: Rent = 2,475 + Dec. rent amount = 2,475 + 2,475/11 = 2,475 + 225 = 2,700
P5-5
Preparing a Multiple-Step Income Statement and Interpreting the Gross Profit Percentage
Aeropostale, Inc., is a mall-based specialty retailer of casual apparel and accessories. The company concept is
to provide the customer with a focused selection of high-quality, active-oriented fashion at compelling value.
The items reported on its income statement for a recent year (ended March 31) are presented here (dollars
in thousands) in alphabetical order:
Cost of goods sold
Interest expenses
Net revenue
Other selling, general, and administrative expenses
Provision for income taxes
Weighted average shares outstanding
1,733,916
417
2,342,260
494,829
43,583
81,208
Required:
Prepare a multiple-step consolidated income statement (showing gross profit, operating income, and income
before income taxes). Include a presentation of basic earnings per share. What is the gross profit
percentage? Explain its meaning.
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Solution:
Aeropostale Inc.
Income Statement
For the year ended March 31
Net Sales
Cost of sales
Gross Profit
Operating Expenses:
Selling, general, and administration expense
Operating Income
Non-operating revenue and gains:
Other income
Non-operating expenses and losses:
Interest expense
Pretax income
Provision for income taxes
Net Income
2,342,260
(1,733,916)
608,344
494,829
(494,829)
113,515
--
--
(417)
(417)
113,098
(43,583)
69,515
Gross profit ratio = Gross profit / Net sales = 608,344 / 2,342,260 = 0.26 = 26%
This means that for every 1$ made in net sales generate 26 cents of gross profit.