Problem 5.5b Prepare A Correct Detailed Multiple Step Income

Problem 5 5bprepare A Correct Detailed Multiple Step Income Statement

Prepare a correct detailed multiple-step income statement. Assume a tax rate of 25%. WRIGHT COMPANY Income Statement For the Month Ended December 31, 2014. The statement should include sales revenues, cost of goods sold, gross profit, operating expenses, income from operations, other revenues and gains, other expenses and losses, income before income taxes, income tax expense, and net income. Adjustments based on provided facts, such as net sales, other revenues, operating expenses, and tax considerations, must be incorporated. Accurately reflect the components as specified, ensuring proper classification and calculation of totals and subtotals, and apply the 25% tax rate to derive income tax expense and net income.

Paper For Above instruction

The preparation of a detailed multiple-step income statement involves a systematic presentation of revenues, expenses, and profit metrics, providing stakeholders with comprehensive insights into the company's financial performance. For Wright Company, this task requires meticulous adjustments based on provided factual data and adherence to proper accounting standards, including the application of a 25% tax rate.

Step 1: Calculate Net Sales

Net sales are derived from gross sales minus sales returns and allowances, as well as freight-out costs, which are included in selling expenses. The gross sales total $972,000, with freight-out expenses of $20,000. Since freight-out is a selling expense, net sales exclude freight-out, yielding net sales of $952,000. Additionally, sales discounts of $12,000 further reduce the gross sales to arrive at net sales. Therefore, net sales are calculated as:

Gross Sales: $972,000

Less: Sales discounts ($12,000) and freight-out ($20,000)

Net Sales = $972,000 - $12,000 - $20,000 = $940,000

Step 2: Determine Other Revenues and Gains

Other revenues comprise sales discounts ($12,000) and interest revenue ($4,000). The total other revenues and gains sum up to:

Other Revenues: $12,000 + $4,000 = $16,000

Step 3: Compute Cost of Goods Sold (COGS)

The cost of goods sold is directly provided as $548,000. This figure is essential for calculating gross profit and appears directly in the income statement.

Step 4: Calculate Gross Profit

Gross profit is calculated as net sales minus cost of goods sold:

Gross Profit = $940,000 - $548,000 = $392,000

Step 5: Determine Operating Expenses

Operating expenses include selling expenses and administrative expenses. From provided details, these are:

• Salaries and wages (selling): $88,000
• Depreciation on equipment: $4,000
• Sales returns and allowances: $46,000
• Advertising: $12,000
• Sales commissions: $10,000
• Office salaries: $54,000
• Utilities: $13,000
• Interest expense: $3,000
• Rent expense (including prepayment): $20,000

All compensation should be classified under Salaries and Wages Expense. Notably, dividends are not operating expenses but distributions and thus are excluded from operating expenses.

Total operating expenses are the sum of all operating expense accounts:

Selling Expenses: $88,000 + $4,000 + $46,000 + $12,000 + $10,000 = $160,000

Administrative Expenses: $54,000 + $13,000 + $3,000 + $20,000 = $90,000

Grand Total Operating Expenses = $160,000 + $90,000 = $250,000

Step 6: Income from Operations

Income from operations is gross profit minus total operating expenses:

Income from Operations = $392,000 - $250,000 = $142,000

Step 7: Account for Other Revenues and Expenses

Other revenues include interest revenue ($4,000); other expenses include interest expense ($3,000). The net other income is:

Other Income = $4,000 - $3,000 = $1,000

Step 8: Calculate Income Before Income Taxes

Income before income taxes combines operating income with other income:

Income Before Income Taxes = $142,000 + $1,000 = $143,000

Step 9: Calculate Income Tax Expense

Applying the 25% tax rate:

Income Tax Expense = $143,000 × 0.25 = $35,750

Step 10: Compute Net Income

Net income is income before taxes minus income tax expense:

Net Income = $143,000 - $35,750 = $107,250

Final Presentation:

The income statement presents these results in a structured multi-step format, beginning with net sales, then gross profit, operating expenses, and culminating in net income. Each component is carefully calculated and adjusted based on detailed provided data, demonstrating accurate financial analysis and compliance with accounting standards.

References

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