Accounting

What the Numbers Mean 10e

Demonstration Problem

Chapter 9 Problem 20
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, 2013:

Selling, general, and administrative expenses . . . . . . . . . . . . . . . $102,000

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Extraordinary gain from lawsuit settlement,
net of tax expense of $14,000. . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Research and development expenses . . . . . . . . . . . . . . . . . . . . . . 74,000
Loss from discontinued operations,
net of tax savings of $10,000 . . . . . . . . . . . . . . . . . . . . . . . . . . 34,000
Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,000
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 979,000
Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,000
Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . . . 296,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544,000
 Problem Definition
a. Calculate the operating income for Spenser
Co. for the year ended December 31, 2013.
b. Calculate the companys net income for 2013.
 Problem Solution
a. Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
 Problem Solution
a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544,000)
 Problem Solution
a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ( 544,000)
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435,000
 Problem Solution
a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544,000)
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435,000
Selling, general, administrative expense . . . . . . . . . . (102,000)
 Problem Solution
a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544,000)
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435,000
Selling, general, and administrative expense . . . . . . . . . (102,000)
Research and development expenses . . . . . . . . . . . . . (74,000)
 Problem Solution
a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $979,000
Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (544,000)
Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $435,000
Selling, general, and administrative expense . . . . . . . . . (102,000)
Research and development expenses . . . . . . . . . . . . . . . (74,000)
Operating income (or Income from operations) . . . . . $259,000
 Problem Definition
a. Calculate the operating income for Spenser Co.
for the year ended December 31, 2014.
b. Calculate the companys net income for 2013.
 Problem Solution
b. Operating income (or Income from operations) . . $259,000
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes . . $131,000
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . (35,000)
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (35,000)
Income from continuing operations . . . . . . . . . . . . . $ 96,000
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (35,000)
Income from continuing operations. . . . . . . . . . . . . . . $ 96,000
Loss from discontinued operations,
net of tax savings of $10,000. . . . . . . . . . . . . . . . . (34,000)
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (35,000)
Income from continuing operations. . . . . . . . . . . . . . . $ 96,000
Loss from discontinued operations,
net of tax savings of $10,000.. . . . . . . . . . . . . . . . . (34,000)
Earnings from extraordinary item. . . . . . . . . . . . . $ 62,000
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (35,000)
Income from continuing operations. . . . . . . . . . . . . . . $ 96,000
Loss from discontinued operations,
net of tax savings of $10,000 .. . . . . . . . . . . . . . . . . (34,000)
Earnings from extraordinary item . . . . . . . . . . . . . . . . $ 62,000
Extraordinary gain from lawsuit settlement,
net of tax expense of $14,000 . . . . . . . . 52,000
 Problem Solution
b. Operating income (or Income from operations) . . . . . $259,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (128,000)
Income from continuing operations before taxes. . . . $131,000
Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (35,000)
Income from continuing operations. . . . . . . . . . . . . . . $ 96,000
Loss from discontinued operations,
net of tax savings of $10,000... . . . . . . . . . . . . . . . . (34,000)
Earnings from extraordinary item . . . . . . . . . . . . . . . . $ 62,000
Extraordinary gain from lawsuit settlement,
net of tax expense of $14,000. . . . . . . . . . . . . . . . . . 52,000
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $114,000
 Accounting
What the Numbers Mean 10e

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