Chapter 5, Problem 10E

To determine

Compute the missing values of the income statement under different cases.

Answer to Problem 10E

Preparation of income statement and computation of missing amounts as given below:

Company N
Statement of Income
For the year ended
Particulars	Amount
	Case A	Case B	Case C	Case D	Case E
Sales revenue	$800	$600	$500	(12) $1,170	(14) $760
Less: Cost of Goods sold	(1) $425	($150)	(9) $280	$500	$320
Gross margin	$375	(4) $450	(8) $220	(11) $670	$440
Less: Administrative expense	$125	(5) $100	$70	$120	$80
Less: Selling expense	(2) $50	$50	$80	$350	$240
Pretax income	$200	$300	(7) $70	$200	(13) $120
Less: Income tax expense	(3) $50	$30	$20	$50	$20
Net income	$150	(6) $270	$50	(10) $150	$100

Table (1)

Explanation of Solution

Financial statement: Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements show the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Income statement: Income statement is a financial statement that shows the net income or net loss by deducting the expenses from the revenues and vice versa.

Working Note:

Determine the amount of cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold}=\text{Sales revenue}-\text{Gross margin}\\ =\$800-\$375\\ =\$425\end{array}$ (1)

Determine the amount of selling expense.

$\begin{array}{c}\text{Selling expense}=\text{Gross margin}-\text{Administrative expense}-\text{ Pretax income}\\ =\$375-\$125-\$200\\ =\$50\end{array}$ (2)

Determine the amount of income tax expense.

$\begin{array}{c}\text{Income tax expense}=\text{Pretax income}-\text{Net income after tax}\\ =\$200-\$150\\ =\$50\end{array}$ (3)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{Sales revenue}-\text{Cost of goods sold}\\ =\$600-\$150\\ =\$450\end{array}$ (4)

Determine the amount of administrative expense.

$\begin{array}{c}\text{Administrative expense}=\text{Gross margin}-\text{Selling expense}-\text{ Pretax income}\\ =\$450-\$50-\$300\\ =\$100\end{array}$ (5)

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\text{Pretax income}-\text{ Income tax expense}\\ =\$300-\$30\\ =\$270\end{array}$ (6)

Determine the amount of pretax income.

$\begin{array}{c}\text{Pretax income}=\text{Net income after tax}+\text{Income tax expense}\\ =\$50+\$20\\ =\$70\end{array}$ (7)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{ Pretax income}+\text{Selling expense}+\text{Administrative expense}\\ =\$70+\$80+\$70\\ =\$220\end{array}$ (8)

Determine the amount of cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold}=\text{ Sales revenue}-\text{Gross margin}\\ =\$500-\$220\left(8\right)\\ =\$280\end{array}$ (9)

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\text{Pretax income}-\text{Income tax expense}\\ =\$200-\$50\\ =\$150\end{array}$ (10)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{ Pretax income}+\text{Selling expense}+\text{Administrative expense}\\ =\$200+\$350+\$120\\ =\$670\end{array}$ (11)

Determine the amount of sales revenue.

$\begin{array}{c}\text{Sales revenue}=\text{Cost of goods sold}+\text{Gross margin}\\ =\$500+\$670\left(11\right)\\ =\$1,170\end{array}$ (12)

Determine the amount of pretax income.

$\begin{array}{c}\text{Pretax income}=\text{Net income after tax}+\text{Income tax expense}\\ =\$100+\$20\\ =\$120\end{array}$ (13)

Determine the amount of sales revenue.

$\begin{array}{c}\text{Sales revenue}=\text{Cost of goods sold}+\text{Gross margin}\\ =\$320+\$440\\ =\$760\end{array}$ (14)