R25A Describe the components of the income statement and alternative presentation formats of that statement.

Question 1

Explain

Answer 1

The income statement shows an entity’s revenues, expenses, gains and losses during a reporting period.

A multi-step income statement provides a subtotal for gross profit and a single step income statement does not. Expenses on the income statement can be grouped by the nature of the expense items or by their function, such as with expenses grouped into cost of goods sold.

Question 2

Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?

Answer 2

Gross profit is equal to sales minus cost of goods sold. Cost of goods sold includes the direct costs of producing a product or service such as raw materials, direct labor, and overhead (fixed costs). Thus, an increase in raw materials costs will result in higher cost of goods sold and lower gross profit. Marketing expenses are considered operating expenses (SG&A), not in cost of goods sold.

Question 3

Gross Profit

Answer 3

Sales - COGS

Question 4

What kind of costs compose COGS?

Answer 4

Direct costs

raw materials, direct labor, overhead (fixed costs)

Question 5

During 2007, Topeka Corporation entered into the following transactions:

Transaction #1 – Interest on a certificate of deposit owned by Topeka was credited to Topeka’s investment account.

Transaction #2 – Topeka sold 10,000 shares of common stock at $30 that had been repurchased by Topeka last year for $20.

Should Topeka recognize the results of these transactions as income on the income statement for the year ended December 31, 2007?

Answer 5

Interest earned on the CD is recognized as interest income. The gain on the sale of treasury stock is not reported on the income statement but is reflected on the statement of changes in stockholders’ equity and on the balance sheet. The sale proceeds simply increase equity and increase cash.

Question 6

Recognize interest earned on a CD

Answer 6

Recognize as interest income.

Question 7

Common stock that has been repurchased is known as…

Answer 7

…treasury stock

Question 8

The gain on the sale of treasury stock is recognized…where?

Answer 8

The gain on the sale of treasury stock is recognized on the statement of changes in SE and the BS

Question 9

How do the sale proceeds of treasurey stock (repurchased common stock) effect the accting equation?

Answer 9

The sale proceeds of treasury stock simple +equity, and +cash

Question 10

Would an increase in the cost of raw materials used in the production of inventory and would an increase in marketing expenses result in lower gross profit?

Answer 10

Gains and losses result from, transactions that are not a part of the firm’s normal business operations. Expenses are amounts that are incurred to generate revenue; thus, expenses result from the firm’s ongoing operations. Both are included on the income statement.