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		702
Sales revenue		7,430		Loss on disposal of plant assets		46
Interest expense		161		Cost of goods sold		3,600
Advertising expense		499		Rent expense		105
Sales returns and allowances		230		Utilities expense		60

Assume a tax rate of 34%.  

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 20%. (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.)

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%.)

Gross profit rate- % Profit margin %

Answer 1

Income Statement (Multi Step)
Revenues
Gross Sales Revenue		$               7,430
Less :
Sales returns and allowances	$                   230	$                  230
Net Sales Revenue		$               7,200
Cost of Goods Sold		$               3,600
Gross Profit		$               3,600
Operating Expenses
Advertising Expense	$                   499
Depreciation Expense	$                     90
Rent Expense	$                   105
Utilities Expense	$                     60
Research and development expense	$                   114
Salaries Expense	$                   460
Total Operating Expenses		$               1,328
Operating Income		$               2,272
Other Income (Expenses)
Interest Expense	$                 -161
Loss on disposal of plant assets	$                    -46
		$                 -207
Income before tax		$               2,065
Income tax expense		$                  702
Net Income		$               1,363

Gross Profit Rate = $3600/7200 = 50%
Profit Margin = 1363/7200 = 18.9%

Revised Figures

Income Statement (Multi Step)
Revenues
Gross Sales Revenue		$               8,916
Less :
Sales returns and allowances	$                   276	$                  276
Net Sales Revenue		$               8,640
Cost of Goods Sold		$               4,320
Gross Profit		$               4,320
Operating Expenses
Advertising Expense	$                   839
Depreciation Expense	$                     90
Rent Expense	$                   105
Utilities Expense	$                     60
Research and development expense	$                   114
Salaries Expense	$                   460
Total Operating Expenses		$               1,668
Operating Income		$               2,652
Other Income (Expenses)
Interest Expense	$                 -161
Loss on disposal of plant assets	$                    -46
		$                 -207
Income before tax		$               2,445
Income tax expense		$                  831
Net Income		$               1,614

Gross Profit Rate = $4320/8640 = 50%
Profit Margin = 1614/8640 = 18.7%