Question

Exercise 5-07

Presented below is information for Lieu Co. for the month of January 2022.

Cost of goods sold		$212,040		Rent expense		$32,000
Freight-out		7,000		Sales discounts		8,000
Insurance expense		12,000		Sales returns and allowances		20,000
Salaries and wages expense		60,000		Sales revenue		370,000
Income tax expense		5,280		Other comprehensive income (net of $400 tax)		2,000

a. Prepare an income statement using the multiple-step format.

b. Prepare a comprehensive income statement.

c. Calculate the profit margin and the gross profit rate

Answer 1

Answer (a) : Income statement for the month ended January 2017 :

Sales
Sales revenue		$3,70,000
Less:
Sales returns and allowances	$20,000
Sales discounts	$8,000
		($28,000)
Net sales		$3,42,000
Cost of goods sold		$2,12,040
Gross profit		$1,29,960
Less: Operating expenses
Freight out	$7,000
Insurance expense	$12,000
Salaries and wage expense	$60,000
Rent expense	$32,000
Total operating expenses		($1,11,000)
Income before income taxes		$18,960
Income tax expenses		$5,280
Net income		$13,680

Answer (b) : comprehensive income statement :

Net income	$13,680
Other comprehensive income	$2,000
Total comprehensive income	$15,680

Answer (c) :

i) profit margin = net income ÷ net sales

= $13,680 ÷ $3,42,000

= 4%

ii) Gross profit rate = gross profit ÷ net sales

= $1,29,960 ÷ $3,42,000

= 38%