Demonstration Problem

1. Accounting What the Numbers Mean 9e Demonstration Problem Chapter 9 – Problem 18 Calculate Operating Income and Net Income

2. Problem Definition • The following information is available from the accounting records of Spenser Co. for the year ended December 31, 2010: Selling, general and administrative expenses. . . . . . . . . . . . . . . . $ 51,000 Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85,000 Extraordinary gain from lawsuit settlement, net of tax expense of $28,000. . . . . . . . . . . . . . . . . . . . . . . . . . . 104,000 Research and development expense . . . . . . . . . . . . . . . . . . . . . . . 37,000 Loss from discontinued operations, net of tax savings of $5,000 . . . . . . . . . . . . . . . . . . . . …. . . . . . 16,000 Provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 74,000 Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 579,000 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,000 Net cash provided by operations. . . . . . . . . . . . . . . . . . . . . . . . 148,000 Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272,000

3. Problem Definition • Calculate the operating income for Spenser Co. for the year ended December 31, 2010. • Calculate the company’s net income for 2010.

4. Problem Solution a. Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000

5. Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold. . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000)

6. Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. $307,000

7. Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense . . . . . . . (51,000)

8. Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense. . . . . . . . . . (51,000) Research and development expenses . . . . . . . . . . . . . (37,000)

9. Problem Solution a. Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $579,000 Cost of goods sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (272,000) Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $307,000 Selling, general and administrative expense. . . . . . . . . . (51,000) Research and development expenses . . . . . . . . . . . . . . . (37,000) Operating income (or Income from operations) . . . . $219,000

10. Problem Definition • Calculate the operating income for Spenser Co. for the year ended December 31, 2010. • Calculate the company’s net income for 2010.

11. Problem Solution b. Operating income (or Income from operations) . . $219,000

12. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000)

13. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes . $155,000

14. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . (74,000)

15. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations . . . . . . . . . . . . $ 81,000

16. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000. . . . . . . . . . . . . . . . . (16,000)

17. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000.. . . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item. . . . . . . . . . . . . $ 65,000

18. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000 .. . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item . . . . . . . . . . . . . . . $ 65,000 Extraordinary gain from lawsuit settlement, net of tax expense of $28,000 …………. . . . . . . . 104,000

19. Problem Solution b. Operating income (or Income from operations) . . . . $219,000 Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (64,000) Income from continuing operations before taxes. . . . $155,000 Provision for income taxes. . . . . . . . . . . . . . . . . . . . . (74,000) Income from continuing operations. . . . . . . . . . . . . . $ 81,000 Loss from discontinued operations, net of tax savings of $5,000... . . . . . . . . . . . . . . . . (16,000) Earnings from extraordinary item . . . . . . . . . . . . . . . $ 65,000 Extraordinary gain from lawsuit settlement, net of tax expense of $28,000. . . . . . . . . . . . . . . . . 104,000 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $169,000

20. Accounting What the Numbers Mean 9e You should now have a better understanding ofhow 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