Question

Goal: Practice creating a multi-step income statement in good form. Information: Management would like you to create Terry's financial statements, beginning with the income statement. In addition to creating the financial statements, Terry's management has asked you to calculate the following financial ratios: • Profit Margin (NI / Net Sales) • Earnings per Share (NI / Common Shares Outstanding) Assignment: 1. Create a multi-step income statement in good form for Terry Co. for Year 2. The following information can be used to break down Terry's operating activities: • Reported depreciation expense is for administrative equipment (not selling equipment). • Shipping expense refers to shipping out sales orders. • Insurance, rent, and utilities costs are treated as administrative expenses. If you have other questions about how the operating activities should be broken down, please ask! 2. Calculate the two (2) ratios listed above. 3. Make all of the necessary closing entries for Terry. You must utilize the income summary account (i.e., do not close revenue and expense directly to retained earnings).

Answer 1

1) Multi-step income statement:
	Amount $
Sales revenue	17000000
Less:Sales discount	204000
Less:Sales returns	807500
Net Sales revenue	15988500
Less: Cost of Goods Sold	9305099
Gross Profit	6683401
Less:Selling Expenses:
Advertising expense	318750
Bad Debt Expense	22100
sales Force Salaries exp.	233750
Selling commissions exp.	850000
Shipping expense	139188
Misc. Selling Exp.	82875
Total Selling Expenses	1646663
Income before Admin expenses	5036738
Less:Administration Expenses:
Depreciation exp.	1020000
Executive Salaries exp.	743750
Insurance expense	84125
Office Supplies exp.	65875
Legal and consulting exp.	10625
Utilities exp.	127500
Misc. Admin exp.	8394
Total Admin Expenses	2060269
Income before Finance cost	2976469
Less:Interest exp.	108375
Income before other income	2868094
Add:Rent revenue	53125
Income before Tax	2921219
Less:Income Tax Exp.	876366
Net Income	2044853

2) Profit Margin = NI/Net Sales = 2044853/15988500 = 12.79%

Earnings per Share = NI/Com. Shares O/s = 2044853/200000 = $10.22 per share

(assuming Par Value of the Common Share being $10, so Number of Shares=

$2000000/10 = 200000 shares)

3) Closing entries:
Date	Accounts Title	Debit $	Credit $
12/31/Year 2	Sales revenue	17000000
	Rent revenue	53125
	Income Summary		17053125
	(revenues transferred to Income summary)
12/31/Year 2	Income Summary	15008272
	Sales discount		204000
	Sales returns		807500
	Cost of Goods Sold		9305099
	Advertising expense		318750
	Bad Debt Expense		22100
	sales Force Salaries exp.		233750
	Selling commissions exp.		850000
	Shipping expense		139188
	Misc. Selling Exp.		82875
	Depreciation exp.		1020000
	Executive Salaries exp.		743750
	Insurance expense		84125
	Office Supplies exp.		65875
	Legal and consulting exp.		10625
	Utilities exp.		127500
	Misc. Admin exp.		8394
	Interest exp.		108375
	Income Tax Exp.		876366
	(being expenses transferred to Income summary)
12/31/Year 2	Income Summary	2044853
	Net Income		2044853
	(Income summary balance transferred to Net Income)
12/31/Year 2	Net Income	2044853
	Retained Earnings		2044853
	(Net Income transferred to Retained Earnings)
12/31/Year 2	Retained Earnings	270000
	Dividends		270000
	(Dividend paid transferred to retained earnings)