B. GENERAL PURPOSE FINANCIAL STATEMENTS - 2b. INCOME STATEMENT/STATEMENT OF PROFIT OR LOSS

Question 1

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Common ratios to analyze income statement: (3)

Answer 1

Gross margin:

Profit margin:

Earnings per share:

Question 2

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Gross margin:

Answer 2

Gross margin: This measures the percentage of sales available for expenses and profit after subtracting COGS.

Gross profit / net sales

Question 3

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Profit margin:

Answer 3

Profit margin: This measures the percentage of sales that becomes profit.

Net income / net sales

Question 4

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Earnings per share:

Answer 4

Earnings per share: Measures net income on a per share basis.

Net Income −Preferred Stock Dividends / Weighted Avg # of Outstanding Common Shares

Example:

ABC corp has net income of $150,000 for 2018 and paid preferred stock dividends of $50,000. At the beginning of 2018, ABC had 1,000 outstanding shares of common stock. On July 1st, ABC issued another 500 shares of common stock. On October 1st, ABC issued another 100 shares. What was ABC’s basic earnings per share for 2018?

Note: If the problem includes a stock dividend or stock split at some point during the year, these are treated as being outstanding the whole year, so the weighting doesn’t apply.

Example: