Curbstone Company
Income Statement
For the Year Ended August 31, 2014
Revenue from sales:
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,132,000
Add: Sales returns and allowances . . . . . . . . . . . . . . . . . . . . . . $422,000
Sales discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115,000 537,000
Gross sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,669,000
Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110,000
Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,559,000
Expenses:
Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 800,000
Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,000
Delivery expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000
$1,759,000
Other expense:
Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,714,000
Answer:
1. Sales returns and allowances and sales discounts should be deducted from (not added to) sales.
2. Sales returns and allowances and sales discounts should be deducted from sales to yield “net sales” (not gross sales).
3. Deducting the cost of merchandise sold from net sales yields gross profit.
4. Deducting the total expenses from gross profit would yield income from operations (or operating income).
5. Interest revenue should be reported under the caption “Other income” and should be added to income from operations to arrive at net income.
6. The final amount on the income statement should be labeled net income, not gross profit.
A correct income statement would be as follows:
CURBSTONE COMPANY
Income Statement
For the Year Ended August 31, 2014
Revenue from sales:
Sales $9,132,000
Less: Sales returns and allowances $422,000
Sales discounts 115,000 537,000
Net sales $8,595,000
Cost of merchandise sold 6,110,000
Gross profit $2,485,000
Expenses:
Selling expenses $ 800,000
Administrative expenses 575,000
Delivery expense 425,000
Total expenses 1,800,000
Income from operations $ 685,000
Other income:
Interest revenue 45,000
Net income $ 730,000