Ch 11

Question 1

QC for Income Statements

Answer 1

Understandability requires that information should be easily understood so the format of the income statement is important.

Question 2

Income Statement following information

Answer 2

Net Sales for Period (Sales-Sales Returns)
Gross Profit for Period (net sales-cost of goods sold)
Adjusted Gross Profit (Gross Profit - inventory loss)
Net profit (Revenues - expenses)

Question 3

Income Statement Format

Answer 3

Revenue
Cash sales
Credit sales
Less Sales returns

less Cost of goods sold
Cost of sales						  
Cartage inwards       				     
				Gross profit				
Less Inventory loss							    
				Adjusted gross profit	
Plus Other revenue
Interest revenue		
Other revenue
Interest revenue							  

Less Other expenses
Rent							
Wages						
Advertising						
Insurance						  	  
				Net profit

Question 4

Cost of Goods Sold – what is included?

Answer 4

Cost of sales
Cartage inwards
Customs duty
Buying expenses

Question 5

Evaluation of Net Profit

Answer 5

The length of the reporting period. Always check the length of time over which the profit was earned.
The trend in the profit over a number of periods
The budgeted, or expected, net profit
The profit earned by similar businesses (industry averages)
The hours worked by a sole proprietor in earning the profit