Demonstration Problem

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Demonstration Problem Accounting What the Numbers Mean 6e Demonstration Problem Chapter 9 – Problem 18 Calculate Operating Income and Net Income

Problem Definition The following information is available from the accounting records of Spenser Co. for the year ended December 31, 2004: Selling, general and administrative expenses. . . . . . . . . . . . . . . . $ 51,000 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Extraordinary gain from early retirement of bonds, net of tax expense of $28,000. . . . . . . . . . . . . . . . . . . . . . . . . . . 104,000 Research and development expense . . . . . . . . . . . . . . . . . . . . . . . 37,000 Loss from discontinued operations, net of tax savings of $5,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,000 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579,000 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000 Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . . . . . 148,000 Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,000

Problem Definition Calculate the operating income for Spenser Co. for the year ended December 31, 2004. Calculate the company’s net income for 2004.

Problem Solution a. Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000

Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000)

Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000

Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense . . . . . . . (51,000)

Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense. . . . . . . . . . (51,000) Research and development expenses . . . . . . . . . . . . . (37,000)

Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense. . . . . . . . . . (51,000) Research and development expenses . . . . . . . . . . . . . . . (37,000) Operating income (or Income from operations) . . . . $219,000

Problem Definition Calculate the operating income for Spenser Co. for the year ended December 31, 2004. Calculate the company’s net income for 2004.

Problem Solution b. Operating income (or Income from operations) . . $219,000

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000)

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes . $155,000

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . (74,000)

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations . . . . . . . . . . . . $ 81,000

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000. . . . . . . . . . . . . . . . . . (16,000)

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000 . . . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item. . . . . . . . . . . . . $ 65,000

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000 . . . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item . . . . . . . . . . . . . . . $ 65,000 Extraordinary gain from early retirement of bonds, net of tax expense of $28,000 . . . . . . . . . . 104,000

Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000 . . . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item . . . . . . . . . . . . . . . $ 65,000 Extraordinary gain from early retirement of bonds, net of tax expense of $28,000. . . . . . . . . . . . . . . . . 104,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,000

Accounting What the Numbers Mean 6e David H. Marshall Wayne W. McManus You should now have a better understanding of how to calculate operating income and net income. Remember that there is a demonstration problem for each chapter that is here for your learning benefit. David H. Marshall Wayne W. McManus Daniel F. Viele