Chapter 5, Problem 11E

To determine

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

Answer to Problem 11E

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

Company BGT
Statement of Income
For the year ended
Particulars	Case A	Case B	Case C	Case D	Case E
Sales revenue	$770	(4) $1,200	(7) $400	$600	$1,050
Less: Cost of Goods sold	(3) $300	$320	$125	$250	(12) $420
Gross margin	(2) $470	$880	(6) $275	(9) $350	$630
Less: Administrative expense	$200	$120	$80	(10) $150	$175
Less: Selling expense	$90	$275	$45	$70	(13)$85
Pretax income	(1) $180	(5) $485	$150	$130	$370
Less: Income tax expense	$65	$210	$60	$45	(14) $130
Net income	$115	$275	(8) $90	(11) $85	$240

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 pretax income.

$\begin{array}{c}\text{Pretax income}=\text{Net income after tax}+\text{Income tax expense}\\ =\$115+\$65\\ =\$180\end{array}$ (1)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{ Pretax income}+\text{Selling expense}+\text{Administrative expense}\\ =\$180\left(1\right)+\$90+\$200\\ =\$470\end{array}$ (2)

Determine the amount of cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold}=\text{Sales revenue}-\text{Gross margin}\\ =\$770-\$470\left(2\right)\\ =\$300\end{array}$ (3)

Determine the amount of sales revenue.

$\begin{array}{c}\text{Sales revenue}=\text{Gross margin}+\text{Cost of goods sold}\\ =\$880+\$320\\ =\$1,200\end{array}$ (4)

Determine the amount of pretax income.

$\begin{array}{c}\text{Pretax income}=\text{Net income after tax}+\text{Income tax expense}\\ =\$275+\$210\\ =\$485\end{array}$ (5)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{ Pretax income}+\text{Selling expense}+\text{Administrative expense}\\ =\$150+\$45+\$80\\ =\$275\end{array}$ (6)

Determine the amount of sales revenue.

$\begin{array}{c}\text{Sales revenue}=\text{Gross margin}+\text{Cost of goods sold}\\ =\$275\left(6\right)+\$125\\ =\$400\end{array}$ (7)

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\text{Pretax income}-\text{ Income tax expense}\\ =\$150-\$60\\ =\$90\end{array}$ (8)

Determine the amount of gross margin.

$\begin{array}{c}\text{Gross margin}=\text{Sales revenue}-\text{Cost of goods sold}\\ =\$600-\$250\\ =\$350\end{array}$ (9)

Determine the amount of administrative expense.

$\begin{array}{c}\text{Administrative expense}=\text{Gross margin}-\text{Selling expense}-\text{ Pretax income}\\ =\$350\left(9\right)-\$70-\$130\\ =\$150\end{array}$ (10)

Determine the amount of net income.

$\begin{array}{c}\text{Net income}=\text{Pretax income}-\text{ Income tax expense}\\ =\$130-\$45\\ =\$85\end{array}$ (11)

Determine the amount of cost of goods sold.

$\begin{array}{c}\text{Cost of goods sold}=\text{ Sales revenue}-\text{Gross margin}\\ =\$1,050-\$630\\ =\$420\end{array}$ (12)

Determine the amount of selling expense.

$\begin{array}{c}\text{Selling expense}=\text{Gross margin}-\text{Administrative expense}-\text{ Pretax income}\\ =\$630-\$175-\$370\\ =\$85\end{array}$ (13)

Determine the amount of income tax expense.

$\begin{array}{c}\text{Income tax expense}=\text{Pretax income}-\text{Net income after tax}\\ =\$370-\$240\\ =\$130\end{array}$ (14)