episode 10 exercise answer 04

Part 4: Solution

Visit the CanGo Intranet to access a draft of CanGo's 1999 multiple-step format income statement prepared by an intern from the local college. Your job is to look it over and identify any errors.

The lines on the income statement which contain errors are indicated in red. Your choices are indicated with a blue bullet. Please see the explanation at the bottom of the page.

1	CanGo
2	Income Statement
3	December 31, 1999
4	(in thousands of U.S. dollars)
5	Book sales	$35,000
6	Interest Revenue	10	$35,010
7	Selling Expenses		(1,000)
8	Grand Margin		$34,010
9	Operating Expenses
10	Cost of Goods Sold	$(20,000)
11	Depreciation	(2,000)
12	Accounts Payable	(4,000)
13	Rent Expense	(500)
14	Utility Expense	(200)	(27,600)
15	Income from Operations		$7,310
16	Other Revenues and Expenses
17	Interest Expense	$(2,000)
18	Online gaming revenue	8,000	6,000
19	Income from Operations		$13,310
20	Income Tax Expense		(3,993)
21	Net Income		$9,317

Explanation:

Line	Mistake
3	Income statements cover a period of time. This line should read "Income Statement for the Year Ended December 31, 1999".
6	Interest Revenue should be in the Other Revenues and Expenses section.
7	Selling Expenses should be part of Operating Expenses. Cost of Goods Sold, not Selling Expenses should be subtracted to get Gross Margin.
8	The title should be Gross Margin or Gross Profit, not Grand Margin.
10	Cost of Goods Sold should be above, just after the revenue section and before Gross Margin.
12	Accounts Payable is a balance sheet account, and should never be on the income statement.
14	The total of the expenses is $26,700, not $27,600.
18	Online gaming is a regular part of CanGo's business. Therefore, it should be included in revenue at the beginning of the statement, rather than in the Other Revenues and Expenses section.
19	This line is Income before Taxes, not Income from Operations as listed.

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