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HW_05_Solutions

# HW_05_Solutions - Solutions to Homework 5 Raffaele B Mari...

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Solutions to Homework 5 Due October 19, 2010 Raffaele B. Mari, CPA Econ 25 Econ of Acctg. EXERCISE 5-8 (a) MARIS COMPANY Income Statement For the Year Ended December 31, 2010 Net sales ............................................. \$2,050,000 Cost of goods sold ............................. 987,000 Gross profit ......................................... 1,063,000 Operating expenses Selling expenses ........................ \$490,000 Administrative expenses ............ 435,000 Total operating expenses ... 925,000 Income from operations .................... 138,000 Other revenues and gains Interest revenue .......................... 65,000 Other expenses and losses Loss on sale of equipment ......... \$83,500 Interest expense ......................... 68,000 151,500 86,500 Income before income taxes ............. 51,500 Income tax expense ........................... 20,000 Net income .......................................... \$ 31,500 (b) Profit margin ratio: \$31,500 ÷ \$2,050,000 = .015 Gross profit rate: \$1,063,000 ÷ \$2,050,000 = .52 (c) During the current year Maris had a loss on the sale of equipment of \$83,500. This loss is not part of operating income, and it is most likely a non- recurring event, meaning that we wouldn’t expect it to happen again ne xt year. If we ignore this loss, then Maris Company’s net incom e would have been \$115,000 (\$31,500 + \$83,500) and its profit margin ratio would have been 5.6% (\$115,000 ÷ \$2,050,000). Therefore, while the loss is not good news, it is less of a concern than a similar drop in income from operations.

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Solutions to Homework 5 Due October 19, 2010 Raffaele B. Mari, CPA Econ 25 Econ of Acctg. PROBLEM 5-4A (a) LOWRY DEPARTMENT STORE Income Statement For the Year Ended November 30, 2010 Sales revenues Sales ............................................... \$904,000 Less: Sales returns and allowances .......................... 20,000 Net sales ......................................... 884,000 Cost of goods sold ................................ 633,300 Gross profit ............................................ 250,700 Operating expenses Salaries expense ........................... \$117,000 Rent expense ................................. 34,000 Utilities expense ............................ 10,600 Depreciation expense store equipment .................................. 9,500
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HW_05_Solutions - Solutions to Homework 5 Raffaele B Mari...

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