Question

Inventories	$150,000
Cost of Goods Sold	$250,000
Administrative Expenses	$50,000
Accumulated Depreciation	$150,000
Sales	$700,000
Depreciation Expense	$25,000
Selling Expenses	$150,000
Common Stock Dividends	$18,000
Interest Expense	$18,000
Corporate Tax Rate	30%

Prepare an income statement using the information given below. Make sure to identify gross profit, operating income, and net income. Please define what each number represents and why it is important to a business.

Answer 1

Income statement

	Amount ($)	Amount ($)
Sales		700000
Less:cost of goods sold		250000
Gross profit		450000
Less : operating expenses
a) Selling expenses	150000
b) Administrative expenses	50000
c) Depreciation expense	25000	225000
Operating income		225000
Less :non operating expense
Interest expense		18000
Income before taxes		207000
Less : Tax (30% of income before taxes)		62100
Net income		144900

1. Gross profit
Gross profit means total sales minus cost incurred for producing a product. Here gross profit is $250000, the gross profit margin is( gross profit /sales ) *100 which is 35.71% which is a good one.gross profit is very important for measuring the performance of an organization and also helps to determine how efficiently the organization has utilized raw materials and labor, etc.

2. Operating income
Operating income is an organization's income from operations by deducting all the operating expenses excluding interest expenses and taxes. here operating income margin is (operating income /net sales )*100 which is 32.14% which is also a higher one. A higher the operating income indicates the company is performing better

3. Net income
Net income is an organization's profit after deducting all the expenses of an organization. Here net income margin is (Net income/sales)*100 which is 20.7% which is not very high but a decent one.Net income is very significant for an organization for paying dividends, getting loans from banks, and for increasing the wealth, and further development of an organization.