Chapter 2, Problem 49E

Use the following information for Exercises 2-47 through 2-49.

Jasper Company provided the following information for last year:

Last year, beginning and ending inventories of work in process and finished goods equaled zero.

Exercise 2-49 Income Statement

Refer to the information for Jasper Company on the previous page.

Required:

1. 1. Prepare an income statement for Jasper for last year. Calculate the percentage of sales for each line item on the income statement. (Note: Round percentages to the nearest tenth of a percent.)
2. 2. CONCEPTUAL CONNECTION Briefly explain how a manager could use the income statement created for Requirement 1 to better control costs.

To determine

Prepare an income statement of Company S for the previous year along with the percentage of sales revenue represented by each line in the income statement.

Explanation of Solution

Income Statement:

The statement that shows revenue and expenses incurred over a period of time (usually one year) is called income statement. It is used for external financial reporting as it helps the outsiders and investors in evaluating the firm’s financial health.

The income statement of Company J for the previous year is given below:

Company J
Income Statement
For Previous Year
	Amount ($)	Percent
Sales revenue	3,360,000	100
Cost of goods sold	795,000	23.7
Gross margin	2,565,000	76.3
Less:
Selling expense	437,000	13
Administrative expense	854,000	25.4
Net Income	1,274,000	37.9

Table (1)

Therefore, the amount of net income and the percentage of net income are $1,274,000 and 37.9% respectively.

Working Notes:

Calculation of sales revenue:

$\begin{array}{c}\text{Sales revenue}=\text{Units sold}\times \text{Selling price per unit}\\ =\text{280,000units}\times \$12\\ =\$3,360,000\end{array}$

Hence, the amount of sales revenue is $3,360,000.

Calculation of cost of goods sold:

$\begin{array}{c}\text{Cost of goods sold}=\left(\begin{array}{l}\text{Direct material}+\text{Direct labor}+\text{Manufacturing overhead}\\ +\text{Beginning finished goods inventory}\\ -\text{Ending finished goods inventory}\end{array}\right)\\ =\$180,000+\$505,000+\$110,000+\$0-\$0\\ =\$795,000\end{array}$

Hence, the amount of cost of goods sold is $795,000.

Calculation of sales revenue percentage with respect to sales revenue:

$\begin{array}{c}\text{Sales revenue percentage}=\left(\frac{\text{Sales revenue}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$3,360,000}{\$3,360,000}\right)\times 100\\ =100\%\end{array}$

The sales revenue percentage is 100%.

Calculation of COGS percentage with respect to sales revenue:

$\begin{array}{c}\text{COGS percentage}=\left(\frac{\text{COGS}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$795,000}{\$3,360,000}\right)\times 100\\ =23.7\%\end{array}$

The COGS percentage with respect to sales revenue is 23.7%.

Calculation of gross margin percentage with respect to sales revenue:

$\begin{array}{c}\text{Gross margin percentage}=\left(\frac{\text{Gross margin}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$2,565,000}{\$3,360,000}\right)\times 100\\ =76.3\%\end{array}$

The gross margin percentage with respect to sales revenue is 76.3%.

Calculation of selling expense percentage with respect to sales revenue:

$\begin{array}{c}\text{Selling expense percentage}=\left(\frac{\text{Selling expense}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$437,000}{\$3,360,000}\right)\times 100\\ =13\%\end{array}$

The selling expense percentage with respect to sales revenue is 13%.

Calculation of administrative expense percentage with respect to sales revenue:

$\begin{array}{c}\text{Administrative expense percentage}=\left(\frac{\text{Administrative expense}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$854,000}{\$3,360,000}\right)\times 100\\ =25.4\%\end{array}$

The administrative expense percentage with respect to sales revenue is 25.4%.

Calculation of net income percentage with respect to sales revenue:

$\begin{array}{c}\text{Net income percentage}=\left(\frac{\text{Net income}}{\text{Sales revenue}}\right)\times 100\\ =\left(\frac{\$1,274,000}{\$3,360,000}\right)\times 100\\ =37.9\%\end{array}$

The net income percentage with respect to sales revenue is 37.9%.

To determine

Describe the way a manager can use the income statement to control the costs.

Explanation of Solution

The income statement reflecting each account in terms of percentage of sales helps in analyzing the effect of each expense on sales. The manager can identify those costs which are relatively high by analyzing percentage. It helps the manager to take necessary actions to control the administrative costs. In case of Company J, administrative expenses were almost double the selling expense. The manager will be able to find ways to control administrative expenses in future.