Question

Required Information [The following Information applies to the questions displayed below.) A company reports the following amount In its December 31, Year 1, Income statement. Sales revenue Non-operating revenue Selling expenses General expenses $315,000 113,089 63,00 53, eee Income tax expense Cost of goods sold Administrative expenses $ 33,00 193, eee 43,00 . The company does not appear to have much profit-generating potential. True False

Answer 1

FALSE. The company does appear to have profit generating potential.

Even though 1 year is not a appropriate time period to gain an understanding on profit generating potential.

However, The company has managed to earn profits in the first year itself which shows the profit potential of the product they are offering since its hard to be profitable in the first year of operations.

Analysis of Profit :

Sales Revenue 315,000

-cost of goods sold (193,000)

Gross profit 1,22,000

The gross profit is 38.73% which is an indication of operations being ran profitably.

So The company has other revenues ($113,000) which along with G.P. (122,000) are easily covering all the other expenses (selling expense 63,000 + income tax 33,000 + general exp 53,000 + Admin exp -43,000).

G.P. + Other income 235,000

Expenses other than Cogs (192,000)

Net profit 43,000

A net profit of 43,000 can be taken as a good sign of profitability potential of the company.