e5.9 prepare multi - step income statement and calculate profitability ratios\nin its income statement for…
e5.9 prepare multi - step income statement and calculate profitability ratios\nin its income statement for the year ended december 31, 2022, darren company reported the following condensed data.\nsalaries and wages expense $465,000\ncost of goods sold 987,000\ninterest expense 71,000\ninterest revenue 65,000\ndepreciation expense 310,000\nloss on disposal of plant assets $83,500\nsales revenue 2,210,000\nincome tax expense 25,000\nsales discounts 160,000\nutilities expense 110,000\ninstructions\n(a) prepare a multiple - step income statement.\n(b) calculate the profit margin and gross profit rate.\n(c) in 2021, darren had a profit margin of 5%. is the decline in 2022 a cause for concern? (ignore income tax effects.)*\nnote: enter a number in cells requesting a value; enter either a number or a formula in cells with a \?\.
Answer
Explanation:
Step1: Calculate gross profit
Gross profit = Sales revenue - Cost of goods sold - Sales discounts Gross profit = $2,210,000 - 987,000 - 160,000=$1,063,000$
Step2: Calculate operating expenses
Operating expenses = Salaries and wages expense+ Depreciation expense + Utilities expense Operating expenses = $465,000+310,000 + 110,000=$885,000$
Step3: Calculate operating income
Operating income = Gross profit - Operating expenses Operating income = $1,063,000 - 885,000=$178,000$
Step4: Calculate non - operating and other items
Non - operating and other items = Interest revenue - Interest expense - Loss on disposal of plant assets Non - operating and other items = $65,000-71,000 - 83,500=-$89,500$
Step5: Calculate income before income taxes
Income before income taxes = Operating income+ Non - operating and other items Income before income taxes = $178,000+( - 89,500)=$88,500$
Step6: Calculate net income
Net income = Income before income taxes - Income tax expense Net income = $88,500 - 25,000=$63,500$
Multiple - step income statement:
| Particulars | Amount ($) |
|---|---|
| Sales revenue | 2,210,000 |
| Less: Cost of goods sold | 987,000 |
| Less: Sales discounts | 160,000 |
| Gross profit | 1,063,000 |
| Less: Operating expenses | |
| Salaries and wages expense | 465,000 |
| Depreciation expense | 310,000 |
| Utilities expense | 110,000 |
| Total operating expenses | 885,000 |
| Operating income | 178,000 |
| Non - operating and other items | |
| Interest revenue | 65,000 |
| Less: Interest expense | 71,000 |
| Less: Loss on disposal of plant assets | 83,500 |
| Total non - operating and other items | - 89,500 |
| Income before income taxes | 88,500 |
| Less: Income tax expense | 25,000 |
| Net income | 63,500 |
Step7: Calculate profit margin
Profit margin = $\frac{Net\ income}{Sales\ revenue}\times100$ Profit margin = $\frac{63,500}{2,210,000}\times100\approx2.87%$
Step8: Calculate gross profit rate
Gross profit rate = $\frac{Gross\ profit}{Sales\ revenue}\times100$ Gross profit rate = $\frac{1,063,000}{2,210,000}\times100\approx48.10%$
Step9: Analyze profit margin decline
In 2021, the profit margin was 5%. In 2022, it is approximately 2.87%. A decline in the profit margin is a cause for concern as it indicates that the company is generating less profit per dollar of sales. This could be due to increased costs, lower selling prices, or inefficiencies in operations.
Answer:
(a) See the multiple - step income statement above. (b) Profit margin: approximately 2.87%, Gross profit rate: approximately 48.10% (c) Yes, the decline in 2022 is a cause for concern.