Question

In its income statement for the year ended December 31, 2017, Darren Company reported the

Answer 1

Answer:

Part a

Darren Company

Multi-step income statement

Sales

Sales revenue                                                                $2,210,000

Less: Sales discounts                                                     ($160,000)

Net Sales                                                                       $2,050,000

Cost of goods sold                                                         ($987,000)

Gross profit                                                                     $1,063,000

Operating expenses

Salaries and wages expense                 $465,000

Depreciation expense                             $310,000

Utilities expense                                       $110,000

Total operating expenses                                            ($885,000)

Income from operations                                                 $178,000

Other revenues and gains

Interest revenue                                     ($65,000)

Other expenses and losses

Loss on disposal of plant assets            $83,500

Interest expense                                      $71,000         ($89,500)

Income before income taxes                                          $88,500

Income tax expense 25,000 28%                                 ($25,000)

Net income                                                                       $63,500

Part b

Darren Company

Profit margin = 3.10 % and gross profit rate = 51.85 %

Part c

Change in profit margin : The Profit Margin has fallen from 5% to 3.10 % in 2017 by 2.10% . The cause of this decline is a concern and must be investigated. The Profit margin rate measure the success with respect of earnings on sales thus more investigations must be done on what caused the earnings to decline in 2017.

Part 1

Cost of Goods Sold has increased by $28,000 ($1,015,000 -$987,000). Income tax rate has not changed.

a. Impact of the change on multi-step income statement

The items of Gross Profit and Income from Operations will decline by $28,000.

b. Impact of the change on profitability ratios

The Profit ratios will decline. Profit margin will be 1.73 %. Gross Profit margin will be 50.49 %

Explanation:

Multiple Step Income Statement shows separately the Operating Income and the Net Income. Operating Income being Income derived from Primary Activities of the Company whilst the Net Income includes the Secondary Activities of the Company such as Income taxes or Sale of assets.

Other Workings :

Profit margin = Net Income / Net Sales x 100

                     =  $63,500 / $2,050,000 x 100

                     =  3.10 %

Gross Profit rate = Gross Profit / Net Sales x 100

                           = $1,063,000 / $2,050,000 x 100

                           =51.85 %