Question

Portsmouth Company was incorporated and began business on January 1, 2019. It has been successful and now requires a bank loan for additional working capital to finance expansion. The bank has requested an audited income statement for the year 2019. The accountant for Portsmouth company provides you with the following income statement, which Portsmouth plans to submit to the bank. Portsmouth Company Income statement Sales revenue $1,000,000 Dividends 30,000 Gain on recovery of insurance proceeds from earthquake loss 40,000 Total 1,070,000 Less: Selling expenses $100,000 Cost of goods sold 500,000 Interest expense 15,000 Loss on obsolescence of inventories 35,000 Loss on discontinued operations 50,000 Operations Administrative expenses 70,000 Total 770,000 Income before income tax 300,000 Income tax 50,000 Net income $250,000

Instructions 1• Indicate the insufficiencies in the income statement presented.

2• Prepare a classified statement of financial position in good form

Answer 1

Income statement of Portsmouth Company for 2019
Particulars	$	$
Sales revenue		1,000,000
Less: Operating expenses
Cost of Goods sold	500,000
Loss on obsolescence of inventory	35,000	535,000
Operating profit		465,000
Less :Selling and administrative expenses
Selling expenses	100,000
Adminstrative expenses	70,000	170,000
Gross profit		295,000
Less :Non operating expenses
Interest expense		15,000
Add: Non operating income
Dividends	30,000
Gain from insurance proceeds	40,000	70,000
Income before taxes		350,000
Less: Income tax		50,000
Income after taxes from continuing operations		300,000
Loss from discontinuing operations		-     50,000
Net income		250,000