Identify the errors in the following income statement:
Curbstone Company Income Statement For the Year Ended August 31, 2019
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,595,000 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,110,000 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,485,000 Expenses: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,000 Delivery expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 425,000 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800,000 $ 685,000 Other expense: Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640,000
Answer:
1. Deducting the cost of merchandise sold from sales yields gross profit (not income
from operations).
2. Deducting the total expenses from gross profit yields income from operations
(or operating income).
3. Interest revenue should be reported under the caption “Other revenue” and
should be added to income from operations to arrive at net income.
4. The final amount on the income statement should be labeled net income, not
gross profit.
A correct income statement is as follows:
Sales$8,595,000
Cost of merchandise sold6,110,000
Gross profit$2,485,000
Expenses:
Selling expenses$800,000
Administrative expenses575,000
Delivery expense425,000
Total expenses1,800,000
Income from operations$ 685,000
Other revenue:
Interest revenue45,000
Net income$ 730,000