CORBIN ENTERPRISES Income Statement

Refer to the list of income statement items in Problem 2-6A. Assume that Corbin Enterprises classifies all operating expenses into two categories:
(1) Selling and
(2) General and administrative.

Required
1. Prepare a multiple-step income statement for the year ended December 31, 2010.
2. What advantages do you see in this form for the income statement?
3. Compute Corbin’s profit margin.
4. Comment on Corbin’s profitability. What other factors need to be taken into account to assess Corbin’s profitability?

SOLUTION

1. Multiple-step income statement:
CORBIN ENTERPRISES
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2010

Sales $350,000 Cost of goods sold 150,000 Gross profit $200,000 Operating expenses: Selling expenses: Advertising $ 9,000 Rent—salesperson’s car 18,000 Total selling expenses $ 27,000 General and administrative expenses: Depreciation—computer $ 4,500 Rent—office 26,400 Supplies—office 1,300 Wages—office 45,600 Utilities 6,750 Total general and administrative expenses 84,550 Total operating expenses 111,550 Income from operations $ 88,450 Other revenues and expenses: Interest expense $ 1,900 Dividend revenue 2,700 Excess of other revenues over other expenses 800 Income before taxes $ 89,250 Income tax expense 30,700 Net income $ 58,550

2. The main advantages of the multiple-step income statement are the groupings of various items and the provision of important subtotals such as income from operations.

3. Profit Margin = Net Income/Sales = $58,550/$350,000 = 16.7%

4. A profit margin of 16.7% means that for every dollar of sales the company has net income of $0.167. This would appear to be a good profit margin, but it would be important to compare the profit margin with prior years and with other companies in the same industry.