Question

Psymon Company, Inc., sells construction equipment. The annual fiscal period ends on December 31. The following adjusted trial balance was created from the general ledger accounts on December 31:
Account Titles Debits Credits
Cash $54,560
Accounts Receivable 22,800
Inventory 83,000
Property and Equipment 62,000
Accumulated Depreciation $26,000
Accounts Payable 38,400
Common Stock 114,000
Retained Earnings, January 1 14,000
Sales Revenue 217,400
Cost of Goods Sold 126,800
Salaries and Wages Expense 21,800
Office Expenses 22,800
Interest Expense 3,200
Income Tax Expense 12,840
Totals $409,800 $409,800

Required:
(a) Prepare a multistep income statement that would be used for internal reporting purposes. Treat Sales Discounts and Sales Returns and Allowances as contra-revenue accounts. TIP: Some of the accounts listed will appear on the balance sheet rather than the income statement.
(b) Prepare a multistep income statement that would be used for external reporting purposes, beginning with the amount for Net Sales.
(c) Compute the gross profit percentage.

Answer 1

Answer:

(a) Multi-step income statement that would be used for internal reporting purposes

Sales Revenue                                                     217,400

Less Cost of Goods Sold                                   (126,800)

Gross Profit                                                           90,600

Less Operating Expenses

Salaries and Wages Expense             21,800

Office Expenses                                  22,800   (44,600)

Operating Income                                               46,000

Less Non Operating Expenses

Interest Expense                                                  (3,200)

Net Income Before Tax                                      42,800

Income Tax Expense                                          (12,840)

Net Income After Tax                                          29,960

(b) Multi step income statement that would be used for external reporting purposes

Sales Revenue                                                     217,400

Less Cost of Goods Sold                                   (126,800)

Gross Profit                                                           90,600

Less Operating Expenses

Salaries and Wages Expense             21,800

Office Expenses                                  22,800   (44,600)

Operating Income                                               46,000

Less Non Operating Expenses

Interest Expense                                                  (3,200)

Net Income Before Tax                                      42,800

Income Tax Expense                                          (12,840)

Net Income After Tax                                          29,960

(c) the gross profit percentage is 41.67%

Explanation:

Internal Reports versus External Reports

Internal reports do not have to conform to any Accounting Standards,However External reports have to confirm and be prepared according to accounting standards for Fair Representation and Comparability purposes

Gross Profit Percentage

Gross Profit Percentage = Gross Profit / Sales × 100

                                        = 90,600/ 217,400 × 100

                                        = 41.67%