The Mathematics of Money

Copyright © 2008, The McGraw-Hill Companies, Inc.

Example 12.1.6 Complete the fi nancial statement shown below by fi lling in the

missing items.

Hawliss-Troomeny Motorsports Corporation

2007 Full Year Income Statement

I. Revenues

Gross sales $3,548,903

Less returns $116,039

Less sales discounts $24,350

Net sales (a)

II. Cost of goods sold

Inventory as of December 31, 2006 $1,275,908

Net purchases $2,671,043

Less inventory as of December 31, 2007 $1,363,024

Cost of goods sold (b)

III. Gross profi t (c)

IV. Operating expenses

Wages, salaries, and benefi ts $427,903

Rent $207,025

Utilities $42,045

Insurance $58,362

Depreciation $35,000

Other $14,445

To tal Operating Expenses (d)

V. Net income before interest and taxes (e)

VI. Other expenses

Provision for taxes $25,000

Interest $32,500

To tal interest and taxes (f )

VII. Net income (g)

(a) Net sales  Gross sales 
 Returns 
 Cash discounts  $3,548,903 
 $116,039 


$24,350  $3,408,514.

(b) Cost of goods sold  Starting inventory  Net purchases 
 Ending inventory 

$1,275,908  $2,671,043 
 $1,363,024  $2,583,927

(c) Gross profi t  Net sales 
 Cost of goods sold  $3,408,514 
 $2,583,927  $824,587

(d) Total operating expenses  Sum of operating expense subcategories  $427,903 

$207,025  $42,045  $58,362  $35,000  $14,445  $784,780

(e) EBIT  Gross profi t 
 Operating expenses  $824,587 
 $784,780  $39,807

(f) Total interest and taxes  Taxes  Interest  $25,000  $32,500  $57,500

(g) Net income  EBIT 
 Total interest and taxes  $39,807 
 $57,500  
$17,693

On the income statement, the net income might be written as ($17,693).

Note that in this example we kept items at the same level of detail lined up in columns.

This is common practice, making it easier for a reader to separate numbers that are totals of

a category from numbers that represent subcategory amounts. Someone who is interested only

in the “big picture” can get it quickly just by looking at the numbers in the rightmost column.

Vertical Analysis of Income Statements

Let’s revisit Sammy’s lemonade stand again. We can see from his income statement that

Sammy made a nice profit from his business venture in the second quarter, and we can get a

sense of how sales and expenses contributed to that profit. Businesses often are interested,

though, in looking more precisely at the relative sizes of profit, various expenses, etc., in

relation to the overall business activity. Sammy could enhance his financial statement by

providing the amounts in each category as a percent of the business’s sales.

12.1 Income Statements 491