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Chapter 6: Problem 1

During the current year, merchandise is sold for \(\$ 250,000\) cash and for \(\$ 975,000\) on account. The cost of the merchandise sold is \(\$ 735,000\). a. What is the amount of the gross profit? b. Compute the gross profit percentage (gross profit divided by sales). c. Win Will the income statement necessarily report a net income? Explain.

Short Answer

Expert verified
a. Gross profit is \(\$ 490,000\). b. Gross profit percentage is 40%. c. Depends on overall expenses and revenues.

Step by step solution

01

Calculate Total Sales

To determine the total sales, add the cash sales to the sales on account.Given:- Cash Sales: \( \\( 250,000 \)- Sales on Account: \( \\) 975,000 \)Total Sales: \( 250,000 + 975,000 = \$ 1,225,000 \)
02

Calculate Gross Profit

Gross profit is calculated by subtracting the cost of goods sold (COGS) from total sales.Given:- Total Sales: \( \\( 1,225,000 \)- Cost of Merchandise Sold: \( \\) 735,000 \)Gross Profit: \( 1,225,000 - 735,000 = \$ 490,000 \)
03

Calculate Gross Profit Percentage

The gross profit percentage is calculated by dividing the gross profit by the total sales and then multiplying by 100 to convert it to a percentage.Gross Profit Percentage: \[ \left( \frac{490,000}{1,225,000} \right) \times 100 = 40\% \]
04

Analyze Potential for Net Income

Whether the income statement reports a net income depends on other expenses and revenues not provided in the exercise. The income statement will report a net income if total revenues exceed total expenses, including operating and non-operating expenses.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Accounting Formulas
In accounting, several key formulas help analyze the financial health of a business. One such essential formula is the calculation of **gross profit**. Gross profit is found using the equation:
  • Gross Profit = Total Sales - Cost of Goods Sold (COGS)
Gross profit indicates the efficiency of a company in selling its products compared to its cost. Calculating gross profit is important because it acts as a stepping stone towards finding the overall profitability of a company.
Another key formula is the **gross profit percentage**, which shows what percentage of sales has turned into profit. It is calculated as:
  • Gross Profit Percentage = \( \left( \frac{\text{Gross Profit}}{\text{Total Sales}} \right) \times 100 \)
A useful indicator, it helps compare profitability across different periods or companies.
Income Statement
The **income statement** is a core financial statement that businesses use to measure their financial performance over a specific period. This statement includes revenue, expenses, and profits or losses, and is sometimes referred to as the "profit and loss statement."
Highlights from the income statement include:
  • **Total Revenues**: Record all sources of income, including sales from cash and on account transactions.
  • **Cost of Goods Sold (COGS)**: This section details the cost directly involved in producing goods or services, influencing the gross profit.
  • **Net Income**: Ultimately, this is the total profit or loss, which considers all revenues minus all expenses, including operating and non-operating costs.
Therefore, the income statement provides a comprehensive view of whether a company is profitable during a particular period.
Cost of Goods Sold
**Cost of Goods Sold (COGS)** is a crucial component in understanding a company's profitability. COGS represents the direct costs required to produce or purchase the goods a company sells during a period. It includes costs like materials and labor but excludes indirect expenses such as distribution costs and sales force costs.
To calculate COGS:
  • Start with the beginning inventory.
  • Add any additional inventory purchased during the period.
  • Subtract the ending inventory.
      • This gives a clear picture of how much cost is directly associated with the goods that were sold, affecting the gross profit. Understanding and managing COGS is vital for businesses to maintain desirable profit margins.

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Most popular questions from this chapter

On January 31,2006 , the balances of the accounts appearing in the ledger of Calloway Company, a furniture wholesaler, are as follows: \(\begin{array}{lrlr}\text { Administrative Expenses } & \$ 80,000 & \text { Notes Payable } & \$ 25,000 \\ \text { Building } & 512,500 & \text { Office Supplies } & 10,600 \\ \text { Cash } & 48,500 & \text { Salaries Payable } & 3,220 \\ \text { Cost of Merchandise Sold } & 560,000 & \text { Sales } & 925,000 \\ \text { Interest Expense } & 7,500 & \text { Sales Discounts } & 20,000 \\ \text { Mark Donovan, Capital } & 628,580 & \text { Sales Returns and Allowances } & 60,000 \\ \text { Mark Donovan, Drawing } & 25,000 & \text { Selling Expenses } & 120,000 \\ \text { Merchandise Inventory } & 130,000 & \text { Store Supplies } & 7,700\end{array}\) a. Prepare a multiple-step income statement for the year ended January \(31,2006 .\) b. Compare the major advantages and disadvantages of the multiple-step and singlestep forms of income statements.

Summary operating data for The Meriden Company during the current year ended June 30,2006 , are as follows: cost of merchandise sold, \(\$ 3,240,000\); administrative expenses, \(\$ 300,000\); interest expense, \(\$ 47,500\); rent revenue, \(\$ 30,000\); net sales, \(\$ 5,400,000\); and selling expenses, \(\$ 480,000\). Prepare a single-step income statement.

Cheddar Company purchased merchandise on account from a supplier for \(\$ 8,500\), terms \(2 / 10, \mathrm{n} / 30\). Cheddar Company returned \(\$ 800\) of the merchandise and received full credit. a. If Cheddar Company pays the invoice within the discount period, what is the amount of cash required for the payment? b. Under a perpetual inventory system, what account is credited by Cheddar Company to record the return?

A sale of merchandise on account for \(\$ 4,000\) is subject to a \(7 \%\) sales tax. (a) Should the sales tax be recorded at the time of sale or when payment is received? (b) What is the amount of the sale? (c) What is the amount debited to Accounts Receivable? (d) What is the title of the account to which the \(\$ 280\) is credited?

Igloo Co. is a newly organized business with a list of accounts at the top of the next page, arranged in alphabetical order. Construct a chart of accounts, assigning account numbers and arranging the accounts in balance sheet and income statement order, as illustrated in Exhibit \(11 .\) Each account number is three digits: the first digit is to indicate the major classification ("1" for assets, and so on); the second digit is to indicate the subclassification ("11" for current assets, and so on); and the third digit is to identify the specific account ("110" for Cash, and so on). \begin{aligned} &\begin{aligned} &\text { Accounts Payable } \\ &\text { Accounts Receivable } \\ &\text { Accumulated Depreciation-Office Equipn } \\ &\text { Accumulated Depreciation-Store Equipme } \\ &\text { Advertising Expense } \\ &\text { Cash } \\ &\text { Cost of Merchandise Sold } \\ &\text { Depreciation Expense-Office Equipment } \\ &\text { Depreciation Expense-Store Equipment } \\ &\text { Income Summary } \\ &\text { Insurance Expense } \\ &\text { Interest Expense } \\ &\text { Kimberly Skilling, Capital } \\ &\text { Kimberly Skilling, Drawing } \\ &\text { Land } \\ &\text { Merchandise Inventory } \\ &\text { Miscellaneous Administrative Expense } \end{aligned}\\\ &\begin{aligned} &\text { Miscellaneous Selling Expense } \\ &\text { Notes Payable (short-term) } \\ &\text { Office Equipment } \\ &\text { Office Salaries Expense } \\ &\text { Office Supplies } \\ &\text { Office Supplies Expense } \\ &\text { Prepaid Insurance } \\ &\text { Rent Expense } \\ &\text { Salaries Payable } \\ &\text { Sales } \\ &\text { Sales Discounts } \\ &\text { Sales Returns and Allowances } \\ &\text { Sales Salaries Expense } \\ &\text { Store Equipment } \\ &\text { Store Supplies } \\ &\text { Store Supplies Expense } \\ &\text { Transportation Out } \end{aligned} \end{aligned}
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