Question

The following income statements were drawn from the annual report of The Western Sales Company. Year 2 Year 1 Sales 40,000 40,000 Cost of Goods Sold (25,000 ) (25,000 ) Gross Margin 15,000 15,000 Operating Expenses (7,000 ) (9,000 ) Operating Income 8,000 6,000 Gain on the sale of land 0 5,000 Net Income 8,000 11,000 If the trends continue, investors can expect the company's net income for Year 3 to____________

Answer 1

Answer:

$9,555

Explanation:

As for the trend provided, the year 3 Sales will also be $40,000

Cost of goods sold will be $25,000

gross margin = $15,000

Operating expenses are decreasing with time by $\frac{9,000 - 7,000}{9,000} = 0.22$

Thus, it will decrease with the same trend = $7,000 - 22.22% = $5,445

Rounded off

Therefore, net income = $15,000 - $5,445 = $9,555

Note: Gain on sale of land is one time event and not permanent, thus it will not be considered as part of trend.