ACCOUNTING 220-Week 3–The Income Statement and Profitability

ACCOUNTING 220-Week 3–The Income Statement and Profitability

Subject: Business    / Accounting
Question
SEC 10K
Week 3 – The Income Statement and Profitability
The notes to the financial statements are integral part of the company’s financial report. Read the
Notes to the Financial Statements (FS) for your SEC 10-K company. These "notes" are displayed
after the financial statements.
1. Note 1 includes accounting information. What is the fiscal year for your SEC 10-K
Company? This may be June 30 each year, or it may be the Sunday closest to the last day
of January, or some other description.
2. Inventory: How is Inventory described for your SEC 10-K company? LIFO, FIFO, and/or
average cost? Relate your answer to topics in our course.
3. Income Statement: Is it a single-step or multi-step income statement? A multi-step
statement (also called a classified income statement) reports levels of income (gross
profit, operating income, net income). Define gross profit, operating income, and net
income. Why are the levels of income important to financial statement users? A singlestep statement reports revenues minus expenses and doesn’t highlight gross profit. Gross
profit must be calculated by the user.
4. Summarize management’s discussion of the company’s performance in the MD&A
section of the annual report.
5. Calculate the Gross Profit and Gross Profit Percentage (Gross Profit/Sales) for this year
and last year, creating a small table, such as the following: Net Sales
Cost of Goods Sold
Gross Profit
Gross Profit Percentage This Year
$1,200
800
400
33% Last Year
$1,400
1,200
200
14% In the example above, sales decreased, gross profit increased, and the gross profit percentage
increased. Therefore, sales are more profitable. The company made 33 cents of gross profit on
every dollar of sales this year, but only 14 cents of gross profit on every dollar of sales last year.
Sales decreased, but sales are actually generating more profit overall, both as an absolute dollar
value and as a percentage.
Be sure to use good form – $ signs for the first number in a column and use commas to separate
thousands. You may drop off zeros similar to the way your company does in its financial
statements but be sure to indicate that the numbers are in thousands (three zeros omitted) or
millions (six zeros omitted).