Question

Suppose in its income statement for the year ended June 30, 2017, The Clorox Company reported the following condensed data (dollars in millions).

Salaries and wages expense $450 Research and development expense $110

Depreciation expense 85 Income tax expense 198

Sales revenue 8,225 Loss on disposal of plat assets 45

Interest expense 210 Cost of goods sold    5,440

Advertising expense 490 Rent expense 115

Sales returns and allowances 225 Utilities expense 65

a) Prepare a multiple-step income statement

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

b) Assume the marketing department has presented a plan to increase advertising expenses by $130 million. It expects this plan to result in an increase in both net sales and cost of goods sold of 25%. Assume a tax rate of 34%. (Hint: Increase both sales revenue and sales returns and allowances by 25%.)

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

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

Answer 1

Income statement
sales
sale revenue	8225
less: sale return & allowance	225
net sales		8000
cost of goods sold		5440
gross profit		2560
operating expenses
salaries & wages exp	450
depreciation exp	85
rent expenses	115
utilities expenses	65
advertising expenses	490
research & development expenses	110
total operating expenses		1315
income from operations		1245
other expenses & losses
inetrest expenses	210
loss on disposal of plant assets	45	255
income before income tax		990
income tax exp		337
net income		653
gross profit = gross profit/sale
gross profit = 2560/8000 = 32%
profit margin = net income/net sale
profit margin = 653/8000 = 8.2%
Income statement
net sales (8000*125%)		10000
cost of goods sold (5440*125%)		6800
gross profit		3200
operating expenses
salaries & wages exp	450
depreciation exp	85
rent expenses	115
utilities expenses	65
advertising expenses	620
research & development expenses	110
total operating expenses		1445
income from operations		1755
other expenses & losses
inetrest expenses	210
loss on disposal of plant assets	45	255
income before income tax		1500
income tax exp @34%		510
net income		990
Gross profit rate = 3200/10000 = 32%
profit margin = 990/10000 = 9.9%