Question

Allstar Exposure designs and sells advertising services to small, relatively unknown companies. Last month, Allstar had sales commissions costs of $50,000, technology costs of $75,000, and research and development costs of $200,000. Selling expenses were $10,000, and administrative expenses equaled $35,000. Sales totaled $410,000.
Required:

1. Prepare an income statement for Allstar for the past month.
2. Briefly explain why Allstar's income statement has no line for cost of goods sold.

Answer 1

Answer:

1) Operating Income is $40,000

2) Allstar is a Service Offering Company

Explanation:

Question 1: To prepare Income Statement for Allstar for the past Month

All-Star Company Income Statement for the Past Month

Particulars                                                          Amount

Sales Revenue                                                  $410,000

Deduct:

Operating Expenses

Technology Cost                           $75,000

Commission Costs                         $50,000

Research and Development         $200,000

Selling Expenses                            $10,000

Administrative Expenses              $35,000   ($370,000)

Operating Income                                            $40,000

2) Why there is no cost of goods sold

Allstar Exposure is a service firm meaning it does not produce goods but only renders services. Since cost of goods only pertain to inventory and only manufacturing or goods producing industries have inventory, Allstar will not have any cost of goods.

Answer 2

Answer:

1. Prepare an income statement for Allstar for the past month.

The income statement is given below.

Sales                              $ 410,000

Commission Cost          ($ 50,000)

Technology Cost           ($ 75,000)

R/D Cost*                       ($ 200,000)

Selling expenses             ($ 10,000)

Admin expenses             ($ 35,000)

Net profit                          $ 40,000

* In absence of information it is assumed that research and development costs of $200,000 meet defination of expense as per accounting standard (IAS 38).

2. Briefly explain why Allstar's income statement has no line for cost of goods sold.

As per question Allstars is a service oriented company. In services oriented company there is no good that company is manufacturing and selling. So there will not be any cost of good sold line item in income statement.