Description
THE INCOME STATEMENT
Assignment Overview
The background material for this module explains and shows examples of income statements. Pay attention to the layout and definitions of the income statement before reviewing the income statement for ABC Company shown below.
This assignment has two parts.
An essay
Answer 10 questions relating to ABC’s income statement.
Case Assignment
The background information for the module includes the basic concepts, but for more ideas go to the optional background source principlesofaccounting.com. The site also offers multiple videos that you may find relevant. You may also use other sites for additional ideas to complete the assignment. Do not forget to reference the sources used.
Part 1
Write a minimum of 300 words about the role of the income statement.
Comment on some significant characteristics of the income statement.
Who is interested in the information?
What kind of information does the income statement convey to users?
Part 2
Review the background material for the third module before attempting the case below in order to answer a series of questions about the income statement for ABC Company shown below. Pay particular attention to the categories of revenues (sales), gross profit (gross margin), operating expenses, and net income (profit).
The background information for the module includes the basic concepts, but for more ideas, go to the optional background source principlesofaccounting.com. The site also offers multiple videos that you may find relevant. You may also use other sites for ideas to complete the table. Do not forget to reference the sources used.
Find an income statement for ABC Company below. The data is to be used for part 2 of the current case assignment and the SLP for this module.
ABC Company
Income Statement
For the Period Ending December 31, 202x
Revenues
$525,000
Cost of Goods Sold
$225,000
Gross Profit
$300,000
Operating Expenses
Salaries
$75,000
Lease for Office Space
$30,000
Advertising and Promotion
$24,000
Utilities
$12,750
Property Taxes
$18,000
Payroll Taxes
$11,500
Insurance
$8,000
Depreciation
$20,000
Miscellaneous Expenses
$9,000
Total Operation Expenses
$208,250
Operating Income
$116,750
Interest Income
$250
Interest Expense
$15,000
Net Interest Expense
$14,750
Net Income
$102,000
Answer each question below and explain your answer with numbers, computations, and 3 to 5 sentences.
What is the cost of sales for the company? Explain the term cost of sales in your own words. Is it likely that the balance sheet of this company includes inventory?
Gross profit (margin) is a key piece of financial information. Why is it so important? How is gross profit affected if cost of sales increases by $20,000? Show the computation and explain.
What are the total operating expenses? What does the term mean?
Does ABC Company have any employees? Explain.
Assume there is an error in the income statement. Property taxes are overstated by $5,000. How is the income statement affected by a correction of property taxes?
What happens to net income if the company hires a new manager at a salary of $50,000? Show how numbers change in the income statement and explain.
Does the company own any equipment? Is it informative to also check the balance sheet to answer this question? Explain.
Does the company have debt? How much debt? Explain how the income statement provides clues to answer the question. Be specific.
How do we know that ABC Company is using the accrual basis of accounting? Hint: Do not forget to look at the balance sheet from the prior module.
What happens to income statement at the end of the period? Is it continuous or does it close (terminate)? Is this different than the handling of the balance sheet?
Assignment Expectations
Follow the instructions carefully. Do not copy and paste definitions.
Complete Part 1 using an essay format.
Do not use an essay format for part 2, but answer each question separately and in order.
Show sources when appropriate. APA format is suggested but not required.
