(a)
A financial statement is the complete record of financial transactions that take place in a company, at a particular period of time. It provides important financial information like assets, liabilities, revenues and expenses of the company to its internal and external users. It helps them to know the exact financial position of the company.
Profitability ratios are the metrics used to measure the profit generating ability of a company for a specific period of time.
To Prepare: The multi-step income statement,
(a)
Explanation of Solution
Prepare the multi-step income statement of W Departmental Store.
Multi-step Income Statement: A multiple step income statement refers to the income statement that shows the operating, and non-operating activities of the business, under separate head. In different steps of the multi-step income statement, principal operating activities are reported that starts from the record of sales revenue with all contra sales revenue account like sales returns, allowances and sales discounts.
W Departmental Store | ||
Income Statement | ||
For the Year Ended November 30, 2017 | ||
Particulars | Amount($) | Amount($) |
Sales revenue | 904,000 | |
Less: Sales returns and allowances | (20,000) | |
Net sales | 884,000 | |
Less: Cost of goods sold | (614,300) | |
Gross profit | 269,700 | |
Less: Operating expenses: | ||
Salaries and wages expenses | 117,000 | |
| 13,500 | |
Advertising expense | 33,500 | |
Freight-out | 6,200 | |
Insurance expense | 9,000 | |
Rent expense | 34,000 | |
Utilities expense | 10,600 | |
Total operating expenses | (223,800) | |
Income from operations | 45,900 | |
Add: Other revenues and gain: | ||
Gain on disposal of plant assets | 2,000 | |
Less: Other expenses and losses: | ||
Interest expense | (5,000) | |
Income before income taxes | 42,900 | |
Less: Income tax expense | (10,000) | |
Net income | 32,900 |
Table (1)
Prepare the retained earnings statement of W Departmental Store.
Retained Earnings Statement: This is a financial statement that shows the amount of net income retained by a company at a particular point of time for reinvestment, and to pay its debts, and obligations. It shows the amount of retained earnings that is not paid as dividends to shareholders.
W Departmental Store | |
Retained Earnings Statement | |
For the Year Ended November 30, 2017 | |
Details | Amount ($) |
Beginning Balance of Retained earnings | 14,200 |
Add: Net Income for the year | 32,900 |
Total Retained Earnings | 47,100 |
Less: Dividends | (12,000) |
Ending balance of Retained Earnings | 35,100 |
Table (2)
Prepare the classified balance sheet of W Departmental Store.
Classified Balance Sheet: This is a financial statement where the assets, liabilities, and
W Departmental Store | ||
Classified Balance Sheet | ||
As of November 30, 2017 | ||
Particulars | Amount ($) | Amount ($) |
Current assets: | ||
Cash | 8,000 | |
| 17,200 | |
Inventory | 26,200 | |
Prepaid Insurance | 6,000 | |
Total current assets | 57,400 | |
Plant assets: | ||
Equipment | 157,000 | |
Less: Accumulated depreciation | -68,000 | |
Total plant assets | 89,000 | |
Total assets | 146,400 | |
Liabilities and Stockholders’ equity | ||
Current liabilities: | ||
Accounts payable | 26,800 | |
Salaries and wages payable | 6,000 | |
Total current liabilities | 32,800 | |
Long-term liabilities: | ||
Notes payable | 43,500 | |
Total liabilities | 76,300 | |
Stockholders’ Equity: | ||
Common stock | 35,000 | |
Retained earnings | 35,100 | |
Total stockholders’ equity | 70,100 | |
Total liabilities and stockholders’ equity | 146,400 |
Table (3)
(b)
The gross profit rate and profit margin of W Departmental Store for 2017.
(b)
Explanation of Solution
Gross profit rate is the financial ratio that shows the relationship between the gross profit and net sales. Gross profit is the difference between the total revenues and cost of goods sold. It is calculated by using the following formula:
Calculate the gross profit rate.
Gross profit = $269,700 (Refer Table 1)
Net sales = $884,000 (Refer Table 1)
Profit margin measures the amount of net income earned from each dollar of sales revenue generated by a company. Thus, it shows the relationship between the net income and net sales. It is calculated by using the following formula:
Calculate the profit margin.
Net income = $32,900 (Refer Table 1)
Net sales = $884,000 (Refer Table 1)
Therefore, the gross profit rate and profit margin of W Departmental Store is 30.51% and 3.72% respectively.
(c)
To Calculate: The expected new net income, revised gross profit rate, and profit margin of W Departmental Store for 2017 if net sales are increased 15%, gross profit is increased by $40,443 and expenses are increased by $58,600.
(c)
Answer to Problem 5.4AP
Calculate the expected new net income.
New gross profit = $310,143 (1)
New expenses = $274,400 (2)
Calculate the revised gross profit rate.
New gross profit = $310,143 (1)
Expected net sales = $1,016,600 (3)
Calculate the revised profit margin.
Expected net income = $35,743 (a)
Expected net sales = $1,016,600 (3)
Working Notes:
Calculate the new gross profit.
Old gross profit = $269,700 (Refer Table 1)
Increased gross profit = $40,443
Calculate the new expenses.
Old expenses = $223,800 (Refer Table 1)
Increased expenses = $50,600
Calculate expected net sales.
Net sales = $884,000
Percentage increased = 15%
Therefore, the expected new net income, revised gross profit rate, and profit margin of W Departmental Store for 2017 are $35,743, 30.51% and 3.52% respectively.
Explanation of Solution
After increase in net sales by 15%, gross profit by $40,443 and expenses by $58,600 the profit margin decreased from 3.72% to 3.52%. However, the gross profit rate remain same in both of the cases.
The second plan presented by the marketing department, and human resource department of W Departmental Store has a merit in higher net sales, that results in higher net income of the company.
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