Question

Suppose in its income statement for the year ended June 30, 2022, The Clorox Company reported the following condensed data (dollars in millions).

Salaries and wages expenses		$ 460		Research and development expense		$ 114
Depreciation expense		90		Income tax expense		430
Sales revenue		5,830		Loss on disposal of plant assets		46
Interest expense		161		Cost of goods sold		2,800
Advertising expense		499		Rent expense		105
Sales returns and allowances		230		Utilities expense		60

Assume a tax rate of 34%.

(a)

Prepare a multiple-step income statement. (Round answers to 0 decimal places, e.g. 15,222.)

(b)

Calculate the gross profit rate and the profit margin. (Round answers to 1 decimal place, e.g. 15.2%.)

Gross profit rate		enter percentages rounded to 1 decimal place	%
Profit margin		enter percentages rounded to 1 decimal place	%

c) Assume the marketing department has presented a plan to increase advertising expenses by $340 million. It expects this plan to result in an increase in both net sales and cost of goods sold of 30%. (Hint: Increase both sales revenue and sales returns and allowances by 25%.) Redo parts (a) and (b) and discuss whether this plan has merit. (Assume a tax rate of 34%, and round all amounts to whole dollars.)

d) Calculate the gross profit rate and the profit margin. (Round answers to 1 decimal place, e.g. 15.2%.)

Gross profit rate		enter percentages rounded to 1 decimal place	%
Profit margin		enter percentages rounded to 1 decimal place	%

Prepare a multiple-step income statement. (Round answers to 0 decimal places, e.g. 15,222.)

Answer 1

a)

particulars		amount(million $)
sales revenue		5830
less:sales returns and allowances		230
net sales		5600
cost of goods sold		2800
gross margin		2800
operating expenses:-
salaries and wages expenses	460
advertising expenses	499
total selling expenses(A)	959
general and administrative expenses
depreciation expense	90
utilities expense	60
rent expenses	105
total general and administrative expenses(B)	255
total operating expenses(A+B)		1214
operating income( C )		1586
others or non operating expenses:-
interest expenses	161
research and development expenses	114
loss on disposal of plant asset	46
total non operating expenses(D)		321
net income before tax(E=C-D)		1265
tax@34%		430
net income after tax		835

b) gross profit margin=gross profit/net sales=2800/5600=50%

net profit margin (after tax)=net profit/net sale=835/5600=14.91%

c) as per condition discribed in this part,the net income will be as follows

particulars		amount(million $)
sales revenue	5830+25%	7288
less:sales returns and allowances	230+25%	288
net sales		7000
cost of goods sold	2800+30%	3640
gross margin		3360
operating expenses:-
salaries and wages expenses	460
advertising expenses	839
total selling expenses(A)	1299
general and administrative expenses
depreciation expense	90
utilities expense	60
rent expenses	105
total general and administrative expenses(B)	255
total operating expenses(A+B)		1554
operating income( C )		1806
others or non operating expenses:-
interest expenses	161
research and development expenses	114
loss on disposal of plant asset	46
total non operating expenses(D)		321
net income before tax(E=C-D)		1485
tax@34%		505
net income after tax		980

compare the net income as per in part (a) and (C),the net incomein part c in higher than that of part a by (980-835)=$145 million,hence this plan is merit .

d) gross profit margin=gross profit/net sales=3360/7000=48%

net profit margin=net profit after tax/net sales=980/7000=14%