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Preparing an Income Statement for L Company

L Company's accounting system listed the following information for the company's 2007 fiscal year (in millions).

Average common shares outstanding 2.5
Cost of goods sold $173.2
Extraordinary gain 19.4
Gain on sale of securities 7.4
General and administrative expenses 73.3
Income taxes (35% of pretax income)
Interest expense 10.0
Interest Income 5.7
Loss associated with cumulative effect
of accounting change 4.0
Loss from discontinued operations 12.3
Sales of merchandise 318.6
Selling expenses 28.5

**Prepare an income statement for L Company for the year ended December 31, 2007. Assume that the tax rate of 35% applies to special items as well as ordinary income.

Solution Preview

This question tests your ability to properly arrange items on the income statement. In general, an income statement should follow the following format:

- Cost of goods sold
= Gross profit
- Selling and administrative expenses
= Income from operation (or operating income)
+ other revenues or gains
- other expenses or losses
= income from continuing operations before income tax
- income tax
= income from continuing operations
+ income/- losses from discontinuing operations
= income before extraordinary item
+ gain/ - losses from extraordinary item
= net income

Extraordinary item include anything that is, well, extraordinary that a reasonable business management will not arrange for such event in advance. Some examples of those events include nature disasters or ...

Solution Summary

Soution prepares an income statement for one year with a tax rate of 35% on special items and ordinary income.