E5.
9 Prepare multi-step income statement and calculate profitability ratios
In its income statement for the year ended December 31, 2022, Darren Company reported the
following condensed data.
Salaries and wages expense $465,000 Loss on disposal of plant assets
Cost of goods sold 987,000 Sales revenue
Interest expense 71,000 Income tax expense
Interest revenue 65,000 Sales discounts
Depreciation expense 310,000 Utilities expense
Instructions
(a) Prepare a multiple-step income statement.
(b) Calculate the profit margin and gross profit rate.
(c ) In 2021, Darren had a profit margin of 5%. Is the decline in 2022 a cause for concern?
(Ignore income tax effects.)
NOTE: Enter a number in cells requesting a value; enter either a number or a formula in cells with a "?" .
(a) DARREN COMPANY
Income Statement
For the Year Ended December 31, 2022
Sales
Sales revenue $2,210,000
Less: Sales discounts 160,000
Net Sales $2,050,000
Cost of goods sold 987,000
Gross profit $1,063,000
Operating expenses
Salaries and wages expense 465,000
Depreciation expense 310,000
Utilities expense 110,000
Total operating expenses 885,000
Income from operations 178,000
Other revenues and gains
Interest revenue 65,000
Other expenses and losses
Loss on disposal of plant assets 83,500
Interest expense 71,000 154,500
Income before income taxes 88,500
Income tax expense 25,000
Net income $63,500
(b) Profit margin
Net income $63,500
Net Sales 2,050,000
3%
Gross profit rate
Gross profit $1,063,000
Net sales 2,050,000
52%
The decline from 5% to 3% is not a cause for concern. The deciding factor in this is the fact that the compa
disposed of a plant asset accounting for a loss of $83,500. This had an effect on profit margin because it lo
(c) the net income, however it had no relation to actual sales of the company and is not a frequent expense.
Without the expense, the companies profit margin ratio is nearly the same as in the previous year.
After you have completed E5.9 , consider the following additional question.
1. Assume that cost of goods changed to $1,015,000 and that the income tax rate is 28%.
What impact does this change have on the multi-step income statement and the
profitability ratios?
(a) DARREN COMPANY
Income Statement
For the Year Ended December 31, 2022
Sales
Sales revenue $2,210,000
Less: Sales discounts 160,000
Net Sales $2,050,000
Cost of goods sold 1,015,000
Gross profit $1,035,000
Operating expenses
Salaries and wages expense 465,000
Depreciation expense 310,000
Utilities expense 110,000
Total operating expenses 885,000
Income from operations 150,000
Other revenues and gains
Interest revenue 65,000
Other expenses and losses
Loss on disposal of plant assets 83,500
Interest expense 71,000 154,500
Income before income taxes 60,500
Income tax expense 16,940
Net income $43,560
(b) Profit margin
Net income $43,560
Net Sales 2,050,000
2%
Gross profit rate
Gross profit $1,035,000
Net sales 2,050,000
50%
Company reported the
n disposal of plant assets $83,500
2,210,000
e tax expense 25,000
160,000
110,000
a cause for concern?
ber or a formula in cells with a "?" .
ng factor in this is the fact that the company
d an effect on profit margin because it lowered
company and is not a frequent expense.
the same as in the previous year.
come tax rate is 28%.
tement and the
