Question

P5.5A An inexperienced accountant prepared this condensed income statement for Simon Company, a retail firm that has been in business for a number of years.

Prepare a correct multiple-step income statement.

Simon Company Income Statement For the Year Ended December 31, 2022
Revenues
Net sales		$850,000
Other revenues		22,000
		872,000
Cost of goods sold		555,000
Gross profit		317,000
Operating expenses
Selling expenses		109,000
Administrative expenses		103,000
		212,000
Net earnings		$105,000

As an experienced, knowledgeable accountant, you review the statement and determine that the following steps were taken by the accountant to compute the amounts presented in the income statement.

• 1. Net sales, as presented, consist of sales $911,000, less freight-out on merchandise sold $33,000, and sales returns and allowances $28,000.
• 2. Other revenues, as presented, consist of sales discounts $18,000 and rent revenue $4,000.
• 3. Selling expenses, as presented, consist of salespersons' salaries $80,000, depreciation on equipment $10,000, advertising $13,000, and sales commissions $6,000. The commissions represent commissions paid. At December 31, $3,000 of commissions have been earned by salespersons but have not been paid. All compensation should be recorded as Salaries and Wages Expense.
• 4. Administrative expenses, as presented, consist of office salaries $47,000, dividends $18,000, utilities $12,000, interest expense $2,000, and rent expense $24,000, which includes prepayments totaling $6,000 for the first quarter of 2023.

Instructions

Evaluate the steps taken by the inexperienced accountant so you can identify corrections that need to be made. Then, prepare a correct detailed multiple-step income statement. (Assume a 25% tax rate.)

Answer 1

Sales

          Sales revenue.............................................................                                                          $911,000

          Less: Sales returns and

                         allowances...................................................                         $28,000                                  

                         Sales discounts............................................                          18,000                       46,000

          Net sales.....................................................................                                                            865,000

Cost of goods sold...............................................................                                                           555,000

Gross profit .........................................................................                         310,000

Operating expenses

          Salaries and wages expense*.....................................                         136,000

          Freight-out.................................................................                           33,000                                  

          Rent expense ($24,000 – $6,000)..............................                           18,000                                  

          Advertising expense..................................................                           13,000                                  

          Utilities expense.........................................................                           12,000                                  

          Depreciation expense.................................................                          10,000                                  

                    Total operating expenses..................................                                                           222,000

Income from operations.......................................................                                                              88,000

Other revenues and gains

          Rent revenue..............................................................                                                                4,000

Other expenses and losses

          Interest expense.........................................................                                                            (2,000)

Income before income taxes................................................                                                              90,000

Income tax expense.............................................................                                                             22,500

Net income .........................................................................                                 $ 67,500

*($80,000 + $6,000 + $3,000 + $47,000)

[(Sales − Contra. rev. accts.) − C.G.S. − Tot. oper. exp. + Other rev. and gains − Other exp. and loss − Inc. tax exp.]

[($911,000 − $46,000) − $555,000 − $222,000 + $4,000 − $2,000 − $22,550]