Highpoint Electronic Financial Statements Vocabulary

ILLUSTRATION 5-9: SALES REVENUE SECTION

  • Sales returns and allowances are considered contra revenue accounts.

  • They are deducted from sales in the income statement to compute Net Sales.

  • Example from Highpoint Electronic's Income Statement (Partial) For the Year Ended December 31, 2002:
      - Sales revenue: 480,000480,000
      - Less: Sales returns and allowances: 20,00020,000
      - Net sales: 460,000460,000

ILLUSTRATION 5-10: CALCULATION OF GROSS PROFIT

  • Gross profit is determined by subtracting cost of goods sold from net sales.

  • Detailed Calculation:
      - Net Sales: 460,000460,000 (100%)
      - Cost of Goods Sold: 316,000316,000 (69%)
      - Gross Profit Calculation:
        - Gross Profit: 460,000−316,000=144,000460,000 - 316,000 = 144,000
        - Gross Profit Percentage: rac{144,000}{460,000} imes 100 ext{%} = 31 ext{%}

ILLUSTRATION 5-12: CALCULATION OF NET INCOME

  • Net income is calculated by deducting operating expenses from gross profit.

  • Detailed Calculation:
      - Gross Profit: 144,000144,000
      - Operating Expenses: 114,000114,000
      - Net Income Calculation:
        - Net Income: 144,000−114,000=30,000144,000 - 114,000 = 30,000

  • Net income represents the "bottom line" of the income statement.

ILLUSTRATION 5-14: MULTI-STEP INCOME STATEMENT FORMAT

  • The multi-step income statement includes both operating and non-operating activities.

  • Non-operating activities are reported immediately after the primary operating activities.

  • Complete Income Statement for Highpoint Electronic For the Year Ended December 31, 2002:
      - Sales Revenue: 480,000480,000
      - Less: Sales Returns and Allowances: 20,00020,000
      - Net Sales: 460,000460,000
      - Cost of Goods Sold: 316,000316,000
      - Gross Profit: 144,000144,000
      - Operating Expenses Breakdown:
        - Selling Expenses:
          - Salaries Expense: 45,00045,000
          - Advertising Expense: 8,0008,000
          - Amortization Expense: 7,0007,000
          - Freight Out: 16,00016,000
          - Total Selling Expenses: 76,00076,000
        - Administrative Expenses:
          - Rent Expense: 19,00019,000
          - Utilities Expense: 2,0002,000
          - Insurance Expense: 17,00017,000
          - Total Administrative Expenses: 38,00038,000
      - Total Operating Expenses: 76,000+38,000=114,00076,000 + 38,000 = 114,000
      - Income from Operations:
        - Income from Operations: 144,000−114,000=30,000144,000 - 114,000 = 30,000
      - Other Revenue and Gains:
        - Interest Revenue: 3,0003,000
        - Gain on Sale of Equipment: 600600
        - Total Non-Operating Revenue and Gains: 3,6003,600
      - Other Expenses and Losses:
        - Interest Expense: 1,8001,800
        - Casualty Loss from Vandalism: 200200
        - Total Non-Operating Expenses and Losses: 2,0002,000
      - Net Non-Operating Revenue: 3,600−2,000=1,6003,600 - 2,000 = 1,600
      - Net Income: 30,000+1,600=31,60030,000 + 1,600 = 31,600

CLASSIFIED BALANCE SHEET: HIGHPOINT ELECTRONIC

  • The balance sheet categorizes assets into current assets and capital assets.

  • Balance Sheet (Partial) as of December 31, 2002:
      - Current Assets:
        - Cash: 9,5009,500
        - Accounts Receivable: 16,10016,100
        - Merchandise Inventory: 40,00040,000
        - Prepaid Insurance: 1,8001,800
        - Total Current Assets: 9,500+16,100+40,000+1,800=67,4009,500 + 16,100 + 40,000 + 1,800 = 67,400
      - Capital Assets:
        - Store Equipment: 80,00080,000
        - Less: Accumulated Amortization: 24,00024,000
        - Total Capital Assets: 80,000−24,000=56,00080,000 - 24,000 = 56,000
      - Total Assets: 67,400+56,000=123,40067,400 + 56,000 = 123,400

  • The classification of merchandise inventory as a current asset is vital, as it indicates liquidity; current assets are listed in order of liquidity.