Flowers by Freddie presented for the income statement below forits most recent f

Question

Flowers by Freddie presented for the income statement below forits most recent fiscal year. The items have been numbered forconvenience in analysis.

1.    Salesrevenue                                              $371,923

2.    Cost of goodssold                                         201,668

3.    Grossprofit                                                  $170,255

4.    Operatingexpenses                                        72,853

5.    Operatingincome                                        $ 97,402

6.    Otherrevenues                                                    538

7.    Otherexpenses                                              (13,277)

8.    Pretaxincome                                                $84,713

9.    Incometaxes                                                   29,650

10. NetIncome                                                    $55,063

Answer the following questions. Be specific. Give examples toclarify.

a.    What is the differencebetween the revenue listed in item (1) and thatlisted in item (6)?

b.    What does item(3) represent, and why is it important?

c.    What do item (2),(4) and (7) have in common?

d.    How are items (2),(4) and (7) different from another?

e.    How is item(9) similar to items (2), (4) and(7)?

f.     Why do you thinkitems (2), (4), (7) and (9) arelisted separately on an income statement rather than being lumpedtogether as one another?

Explanation / Answer

a The Revenue in ( 1 ) is from the main activities ofthe business. The Revenue in ( 6 ) is from other activities of thebusiness . Example , Interest Revenue , Rental Revenue b Item ( 3 ) represents the Gross Profit of the firm. Gross profit tells us about the competetive strength of acompany. Gross profit is also an indicator of the financial health of acompany. c ( 2 ) , ( 4 ) & ( 7 ) are expenditure accounts. d ( 2 ) represents the Cost of Goods Sold . Cost of Goods Sold = Opening Stock + Purchases - Closing Stock. ( 4 ) represents the expenditure incurred for the operations .Example : Salaries , Wages etc. ( 7 ) represents non-operating expenses like interest etc e ( 9 ) is also an expenditure account. f The separate listing seperates operating transactions fromnon-operating transactions. It matches Costs & Expenses with relatedrevenue. Separate listing highlights certain intermediatecomponents of income that analysts use to compute ratios forassesing the performance of a company.

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