Question

Presented below is information that relates to Halifax Limited for 2020:

Accounts Payable 49,000

Accounts Receivable 78,000

Bond Payable 600,000

Cash dividends declared on common shares 34,000

Collections of credit sales $1,100,000

Cost of goods sold 1,100,000

Equipment 85,000

Gain from transactions in foreign currencies (pre-tax) 220,000

Inventory 120,000

Loss on sale of equipment 350,000

Loss from early debt repayment 340,000

Loss resulting from calculation error on depreciation charge in 2019 460,000

Other expenses 120,000

Other revenues 180,000

Proceeds from issue of Halifax common shares 60,000

Retained earnings, January 1, 2020 800,000

Sales 1,900,000

Selling and administrative expenses 290,000

Unrealized Gain FV-NI 20,000

Additional information to be included: On September 1, 2020, Halifax sold one of its segments (product line) to Best Industries for a gain (pre-tax) of $550,000. During the period January 1 to August 31, the discontinued segment incurred an operating loss (pre-tax) of $480,000. This loss is not included in any of the numbers shown above.

Instructions In good form, prepare a multiple-step income statement for 2020. Assume a 20% income tax rate and that 20,000 common shares were outstanding during the year. Include Earnings Per Share.

Answer 1

First understand basics

How to Prepare an Income Statement? A Simple 10 Step Business Guide

• To prepare an income statement generate a trial balance report, calculate your revenue, determine the cost of goods sold, calculate the gross margin, include operating expenses, calculate your income, include income taxes, calculate net income and lastly finalize your income statement with business details and the reporting period.
• To prepare an income statement, small businesses need to analyze and report their revenues, expenses and the resulting profits or losses, for a specific reporting period. The income statement, also called a profit and loss statement, is one of the major financial statements issued by businesses, along with the balance sheet and cash flow statement. Income statements show how much profit a business generated during a specific reporting period and the amount of expenses incurred while earning revenue.

How to Write an Income Statement

We have a free income statement template you can use as a guideline. Or, continue reading to start creating one from scratch!

To write an income statement and report the profits your small business is generating, follow these accounting steps:

1. PICK A REPORTING PERIOD

The first step in preparing an income statement is to choose the reporting period your report will cover. Businesses typically choose to report their income statement on an annual, quarterly or monthly basis. Publicly traded companies are required to prepare financial statements on a quarterly and annual basis, but small businesses aren’t as heavily regulated in their reporting. Creating monthly income statements can help you identify trends in your profits and expenditures over time. That information can help you make business decisions to make your company more efficient and profitable.

2. GENERATE A TRIAL BALANCE REPORT

To create an income statement for your business, you’ll need to print out a standard trial balance report. You can easily generate the trial balance through your cloud-based accounting software. Trial balance reports are internal documents that list the end balance of each account in the general ledger for a specific reporting period. It will give you all the end balance figures you need to create an income statement.

3. CALCULATE YOUR REVENUE

Next, you’ll need to calculate your business’s total sales revenue for the reporting period. Your revenue includes all the money earned for your services during the reporting period, even if you haven’t yet received all the payments. Add up all the revenue line items from your trial balance report and enter the total amount in the revenue line item of your income statement.

4. DETERMINE COST OF GOODS SOLD

Your cost of goods sold includes the direct labor, materials and overhead expenses you’ve incurred to provide your goods or services. Add up all the cost of goods sold line items on your trial balance report and list the total cost of goods sold on the income statement, directly below the revenue line item.

5. CALCULATE THE GROSS MARGIN

Subtract the cost of goods sold total from the revenue total on your income statement. This calculation will give you the gross margin, or the gross amount earned from the sale of your goods and services.

6. INCLUDE OPERATING EXPENSES

Add up all the operating expenses listed on your trial balance report. Enter the total amount into the income statement as the selling and administrative expenses line item. It’s located directly below the gross margin line.

7. CALCULATE YOUR INCOME

Subtract the selling and administrative expenses total from the gross margin. This will give you the pre-tax income. Enter the amount at the bottom of the income statement.

8. INCLUDE INCOME TAXES

To calculate income tax, multiply your applicable state tax rate by your pre-tax income figure. Add this to the income statement, below the pre-tax income figure.

9. CALCULATE NET INCOME

To determine your business’s net income, subtract the income tax from the pre-tax income figure. Enter the figure into the final line item of your income statement.

10. FINALIZE THE INCOME STATEMENT

To finalize your income statement, add a header to the report identifying it as an income statement. Add your business details and the reporting period covered by the income statement.

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