Jan Lorange manages Poppa Rollo's Pizza, which has prospered during its second year of operation. In order to help her decide whether to open another pizzeria, Lorange has prepared the current income statement of the business. Lorange read in an industry trade journal that a successful two-year-old pizzeria meets the following criteria:
a. Gross profit percentage is at least 60%.
b. Net income is at least $90,000.
Lorange believes the business meets both criteria. She intends to go ahead with the expansion plan and asks your advice on preparing the income statement in accordance with generally accepted accounting principles. When you point out that the statement includes errors, Lorange assures you that all amounts are correct. But some items are listed in the wrong place.
(See Attatchment 5-1)
1. Prepare a multi-step income statement and make a recommendation about whether Lorange should undertake the expansion.
Less: Returns 10,700
Total gross sales 184,300
Cost of goods sold 85,200
Gross profit ...
The solution shows how to prepare the multi-step income statement needed and makes a recommendation about whether Lorange should undertake the expansion.