Module Case Assignment: THE INCOME STATEMENT
Overview
The background material for this module explains and shows examples of income statements. Pay attention to the layout and definitions of the income statement before reviewing the income statement for ABC Company shown below.
Case Assignment
The background information for the module includes the basic ideas, but for more ideas go to the optional background source principlesofaccounting website. The site also offers multiple videos that you may find relevant. You may also use other sites to for ideas to complete the table. Do not forget to reference the sources used.
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ABC Company
Income Statement
For the Period Ending December 31, 20XX
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Revenues
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$ 525,000
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Cost of sales
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200,000
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Gross profit
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$ 325,000
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Operating expenses
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Salaries
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$ 100,000
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Lease for office
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30,000
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Advertising and promotion
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24,000
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Utilities
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12,750
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Property taxes
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18,000
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Payroll taxes
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11,500
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Insurance
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8,000
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Depreciation
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20,000
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Miscellaneous expenses
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9,000
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Total operating expenses
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$ 233,250
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Operating income
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91,750
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Interest income
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250
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Interest expense
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15,000
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Net interest expense
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14,750
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Net income
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77,000
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Answer the questions below and explain your answer with numbers, computations, or a sentence or two.
1. Explain the term cost of sales in your own words. Is likely that the balance sheet of this company includes inventory?
2. Gross profit (margin) is a key piece of financial information. Why is it so important?
3. Explain operating expenses? What does the term mean?
4. Does ABC Company have any employees? Explain.
5. There is an error in the income statement. Property taxes are overstated by $10,000. How is the income statement affected by a correction of property taxes?
6. What happens to net income if the company hires a new manager at a salary of $80,000?
7. Does the company own any equipment? Is it informative to also check the balance sheet to answer this question? Explain.
8. Does the company have debt? How much debt? Explain how the income statement and balance sheet provide answers to the questions?
9. How do we know that ABC Company is using the accrual basis of accounting? Hint: Do not forget to look at the balance sheet from the prior module.
10. What happens to income statement at the end of the period? Is it continuous or does it close (terminate)?
Module SLP: THE INCOME STATEMENT
Before you start the assignment, test your understanding of concepts covered in the assignment. It is not a graded quiz, but a tool for reviewing some key points. The tool can be used multiple times.
The purpose of this SLP is to apply ratio analysis to assess the financial health of ABC Company. Use the income statement presented in the case during this module to compute general or overall profitability ratios. Compute three ratios using at least one of the income statement accounts for each ratio. Some profitability ratios include both income and balance sheet accounts. The balance sheet accounts are found in module 2.
Assume that ABC Company is a small specialty retail store. Ratios are relevant when assessed over time or across companies. IBIS is a comprehensive resource containing market research and statistics, which can be used to compare ABC Company to the industry and leaders in the industry.
1. Show the computation of the three ratios.
2. Comment on the purpose and information conveyed by each ratio.
3. What did you learn about ABC Company by reviewing the three ratios?
4. What is your conclusion about the profitability of the company?
5. How successful is ABC Company relative to the industry average and leaders in the small specialty retail store industry? Write two paragraphs or more. Include ratios found in the IBIS database to support your conclusion.
The IBIS database is accessed through the Trident library.
Format your assignment according to the following formatting requirements:
1. The answer should be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides.
2. The response also includes a cover page containing the title of the assignment, the student's name, the course title, and the date. The cover page is not included in the required page length.
3. Also include a reference page. The Citations and references should follow APA format. The reference page is not included in the required page length.