Describe Matching Principle List and describe the different aspects of what Professor
Albrecht calls the expense matching principle and what the textbook calls the matching principle.
For each of the parts of the principle, describe it in a sentence or two and then provide an example.
Define Expense One of the key elements of the financial statements is expense . As best you can, define and describe it. Provide an example (s) to flesh our your definition.
© 2014 by W. David Albrecht 159

Multiple and single step income statements.
The Miller Company accounts show the following account balances. Prepare both a multiple and single step income statement, as well as EPS presentation. There are 20,000 shares of common stock outstanding throughout the year.
Other administrative
Rent revenue
Interest expense
Depreciation (selling)
Salaries/wages (admin)
Supplies (selling)
Cost of goods sold expense
Depreciation (admin)
Net sales
Salaries/wages (selling)
Income tax expense
47,300
18,000
38,000
56,580
310,500
21,420
724,500
18,600
1,571,100
127,500
48,200
Multiple step income statement with discontinued operations.
The Diller Company account sho the following account balances. Prepare a multiple step income statement in good form, as well as EPS presentation. There are 30,000 shares of common stock outstanding throughout the year.
The income tax rate is 30%.
Cost of goods sold expense
Selling expense
Loss from discontinued operations (pre-tax)
Sales
Administrative expense
Income tax expense
395,000
113,000
50,000
843,000
145,000
(30%)
© 2014 by W. David Albrecht 160

Multiple and single step income statements.
The Miller Company accounts show the following account balances. Prepare both a multiple and single step income.
Interest expense
Telephone & Internet exp (sales)
Maintenance & repairs (admin)
Depreciation expense (sales)
Sales revenue
Delivery expense
Depreciation expense (admin)
Sales discounts
Bad debt expense
Income tax expense
Cost of goods sold expense
Dividend revenue
Sales returns
Salaries/wages (sales)
Salaries/wages (admin)
Telephone & Internet exp (sales)
Maintenance & repairs (admin)
Depreciation expense (sales)
Sales commissions
Office supplies used
Travel expenses (sales)
Telephone & Internet exp (admin)
Entertainment expense
Property tax expense
Office expense
Maintenance & repairs exp (sales)
Miscellaneous selling exp
326,411
14,994
3,510
12,500
105,382
4,466
19,522
17,114
16,520
21,550
9.300
5,633
21,538
39,000
14,994
3,510
12,500
2,415,200
73,599
11,300
45,333
5,392
245,331
970,572
113,200
69,432
110,529
© 2014 by W. David Albrecht 161

Multiple Step Income Statement & Common Size The Zilly Ziller Company, a manufacturer of metal attachments for furniture, has reported the following income statements in single-step format.
Sales revenue
Gains
Interest revenue
Total revenues and gains
2008
3,156,278
146,738
15,325
3,318,341
2007 2006
3,373,963 3,872,346
285,494 153,784
18,347 21,689
3,677,804 4,047,819
Cost of sales
Selling expenses
Administrative expenses
R&D expenses
Interest expense
Losses
Total expenses and losses
Pre-tax income
Income tax expense
Net income
2,563,235
585,432
65,789
186,546
27,437
237,549
3,665,988
2,632,343 2,342,674
523,785 475,823
96,568 74,357
216,433
37,854
164,385
263,854
7,346
84,246
3,671,368 3,248,300
(347,647)
(76,482)
(271,165)
6,436
1,416
5,020
799,519
175,894
623,625
Required:
(1) On a separate sheet of paper, rearrange the income statements into multiple-step format.
(2) On a second sheet of paper, perform a vertical analysis on your multiple-step income statements.
Please show tenths of a percentage (e.g., 23.4%).
(3) Perform an horizontal analysis on sales revenue..
(4) Comment on the trends you discern in your analyses. Be sure to mention the gross margin percentage in your discussion.
© 2014 by W. David Albrecht 162

Reconstructing an income statement
Gross margin
Cost of goods sold expense as a percentage of sales
Interest expense as a percentage of operating income
Income tax expense as a percentage of pre-tax income
Operating income as a percentage of sales
Operating expenses as a percentage of sales
$589,236
40%
20%
30%
20%
? %
Required: Using the above data, prepare a multiple step income statement in reasonably good form. The multiple step income statement should be cast both in dollar amounts and as common size.
Net income
Net income as percentage of sales
Cost of goods sold expense as percentage of sales
Income tax expense as percentage of pre-tax income
$168,000
12%
48%
20%
Required: Using the above data, prepare a multiple step income statement. It should be both in dollar amounts and common size.
The Chen Company has released only a few clues about its earnings for the most recent year.
Cost of goods sold expense
Net income as a percentage of sales
Gross margin as a percentage of sales
Gain
Income tax expense as a percentage of pre-tax income
Operating expenses as a percentage of gross margin
$300,000
36 %
60 %
$75,000
20%
41.667% (25/60)
Required: Using the above clues, prepare a multiple step income statement in good form. The income statement should include a columns for numbers and common size percentages.
© 2014 by W. David Albrecht 163

Analyzing and Forecasting an Income Statement
The Coffee Company published the following income statements for the past two years:
Year
Sales Revenue
Cost of Goods Sold Expense
Gross Margin
Selling & Administrative Expenses
Operating Income
Extraordinary Gain (nonrecurring)
Income Tax Expense
Net Income
2007
$500,000
200,000
300,000
180,000
120,000
0
12,000
108,000
2008
$600,000
240,000
360,000
216,000
144,000
36,000
18,000
162,000
1.
Compute the percentage increase in sales from 2007 to 2008?
2.
Compute the percentage increase in net income from 2007 to 2008?
3.
Prepare a projected income statement for 2009, assuming that sales revenue and operating expenses increase by 20%.
© 2014 by W. David Albrecht 164

Income statement vertical/horizontal analyses
Net sales
Operating expenses
CGS
Selling
Administrative
Total
Operating Income
Other
Gain on sale
Pre-tax income
Income tax expense
Income from continuing ops
Income from discont ops (NOT)
Net Income
2008
709,269
2007
610,315
281,339
139,620
211,501
632,460
76,809
44,000
120,809
16,913
103,896
0
103,896
254,320
74,800
156,222
485,342
124,973
0
124,973
17,496
107,477
(30,000)
77,477
Required:
1.
Perform vertical and horizontal analyses for the preceding income statements.
2.
For which year was the company more successful? Explain
3.
Approximately how much income do you expect the company to earn in 2009 if sales revenue and the operating expenses increase by 10%?
© 2014 by W. David Albrecht 165

Income statement vertical analysis
Sales revenue
Service revenue
Interest revenue
Gains
Cost of sales
Selling expense
Administrative expense
Research & development
Interest expense
Losses
2008
1,023,519
529,000
11,025
0
1,563,544
489,356
234,706
374,944
52,456
85,295
21,674
1,258,431
305,113
2007 2006
953,519 1,162,489
319,211 447,543
9,899
0
14,225
50,000
1,282,629 1,674,257
527,404
210,574
382,945
185,394
78,346
521,925
167,329
379,524
350,562
53,895
38,258 0
1,422,921 1,473,235
(140,292) 201,022 Net Income
Required:
1.
Convert the above single step income statements to multiple step.
2.
Perform vertical analyses (common size) for the multiple step income statements.
3.
Compared to 2006, why was 2007 so bad?
4.
Was 2008 really a better year than 2006?
© 2014 by W. David Albrecht 166

Income statement vertical analysis.
The Richardson Company, a manufacturer of metal attachments for furniture, has reported the following income statements in single-step format.
Sales revenue
Gains
Interest revenue
Total revenues and gains
2011 2010 2009
9,000,000 7,000,000 6,000,000
0 500,000 600,000
55,000 50,000 40,000
9,055,000 7,550,000 6,640,000
Cost of sales
Selling expenses
Losses
Administrative expenses
Interest expense
R&D expenses
Total expenses and losses
4,000,000 3,250,000 3,000,000
1,080,000
3,000,000
400,000
980,000
200,000
350,000
900,000
100,000
300,000
22,000 20,000 18,000
1,500,000 900,000 600,000
10,002,000 5,700,000 4,918,000
Pre-tax income
Income tax expense
Net income
(947,000) 1,850,000 1,722,000
(142,050) 277,500 258,300
(804,950) 1,572,500 1,463,700
Required:
(1) On a separate sheet of paper, rearrange the income statements into multiple-step format.
(2) Perform a vertical (common size) analysis on your multiple-step income statements. Please show tenths of a percentage (e.g., 23.4%). This may be in a column immediately to the right of the number.
(3) Perform an horizontal analysis on sales revenue.
(4) Comment on the trends you discern in your analyses. Be sure to mention the gross margin percentage in your discussion. Which was the best year, in your opinion?
© 2014 by W. David Albrecht 167

Intraperiod tax allocation.
The XYZ company has several business segments.
Several of the segments will continue operations under XYZ management into the future. One business segment is sold off during the period. XYZ reports the following income statement items, all of which are pre-tax:
Revenues of $400,000 from continuing segments only
Expenses of $280,000 from continuing segments only
Gains of $30,000 from continuing segments only
Losses of $50,000 from continuing segments only.
Gain of $40,000 on disposal of the discontinued segment only
The average corporate income tax rate is 25%.
Required:
(1) Prepare an income statement in good form
(2) Now assume that the $40,000 gain from disposal is actually a loss. Prepare an income statement in good form.
Intraperiod Tax Allocation
The Salem Company reported the following income statement (multiple step format) for 2013. The
Salem Company incurs a 25% tax rate.
Revenues $240,000
Cost of goods sold expense
Gross margin
Other expenses
Pretax income
110,000
130,000
50,000
80,000
Income tax expense
Income from continuing operations
Income from discontinued operations (net)
Net Income
20,000
60,000
15,000
72,000
Required: What is the total amount of 2013 tax to be paid by Salem?
© 2014 by W. David Albrecht 168