Question

1. Gloria J Company provided the following information for 2019.

Purchases	5,250,000.00
Purchases returns and allowances	150,000.00
Rental income	250,000.00
Selling expenses:
Freight out	175,000.00
Salesmen’s commission	650,000.00
Depreciation – store equipment	125,000.00
Merchandise inventory, January 1	1,000,000.00
Merchandise inventory, December 31	1,500,000.00
Sales	7,850,000.00
Sales returns and allowances	140,000.00
Sales discounts	10,000.00
Administrative expenses
Officers’ salaries	500,000.00
Depreciation – office equipment	300,000.00
Freight in	500,000.00
Income tax	250,000.00
Loss on sale of equipment	50,000.00
Purchase discounts	100,000.00
Dividend revenue	150,000.00
Loss on sale of investment	50,000.00

Required: Prepare an income statement using “functional method” for the year with supporting notes

*Hint: don't miss out income tax

Answer 1

Income statement using functional method is similar as normal income statement with the expenses depicting bifurcations in the line of distribution/selling , administration and other costs.    

                                                Income Statement

                                                Using Functional method

Particulars	Notes	Amount ($)	Amount ($)
Net sales revenue	1		7,700,000
Cost of goods sold	2		5,000,000
Gross income			2,700,000
Other income	3		400,000
Total income			3,100,000
Expenses
Distribution costs	4	950,000
Administrative expenses	5	800,000
Other expenses	6	100,000	1,850,000
Income before tax			1,250,000
Income tax expense			250,000
Net income			1,000,000

Working notes

Note 1 – Net sales revenue
Gross sales		7,850,000
Sales returns and allowances		-140,000
Sales discounts		-10,000
Net sales revenue		7,700,000

Note 2 – Cost of goods sold
Inventory, January 1		1,000,000
Purchases	5,250,000
Freight in	500,000
Purchase returns and allowances	-150,000
Purchase discounts	-100,000
Net purchases		5,500,000
Goods available for sale		6,500,000
Inventory, December 31		-1,500,000
Cost of goods sold		5,000,000

Note 3 – Other income
Rental income		250,000
Dividend revenue		150,000
Total other income		400,000

Note 4 – Selling/distribution expenses
Freight out		175,000
Salesmen’s commission		650,000
Depreciation – store equipment		125,000
Total selling expenses		950,000

Note 5 – Administrative expenses
Officers’ salaries		500,000
Depreciation – office equipment		300,000
Total administrative expenses		800,000

Note 6 – Other expenses
Loss on sale of equipment		50,000
Loss on sale of investment		50,000
Total other expenses		100,000

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