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Financial Statements

Lowry Department Store is located in midtown Metropolis. During the past several years, net income has been declining because suburban shopping centers have been attracting business away from city areas. At the end of the company's fiscal year on November 30, 2010, these accounts appeared in its adjusted trial balance.

Accounts Payable $23,300
Accounts Receivable 17,200
Accumulated Depreciation - Delivery Equipment 20,000
Accumulated Depreciation - Store Equipment 38,000
Cash 8,000
Common Stock 35,000
Cost of Goods Sold 633,300
Delivery Expense 6,200
Delivery Equipment 57,000
Depreciation Expense - Delivery Equipment 4,000
Depreciation Expense - Store Equipment 9,500
Dividends 12,000
Gain on Sale of Equipment 2,000
Income Tax Expense 10,000
Insurance Expense 9,000
Interest Expense 5,000
Merchandise Inventory 26,200
Notes Payable 47,500
Prepaid Insurance 6,000
Property Tax Expense 3,500
Property Taxes Payable 3,500
Rent Expense 34,000
Retained Earnings 14,200
Salaries Expense 117,000
Sales 904,000
Salaries Payable 6,000
Sales Returns and Allowances 20,000
Store Equipment 105,000
Utilities Expense 10,600

Additional data: Notes payable are due in 2014.

Complete the multiple-step income statement, a retained earnings statement, and a classified balance sheet. (List expenses from largest to smallest amount, e.g. 10, 5, 2.)

Income Statement

Sales revenues

Net Sales

Gross Profit
Operating Expenses

Total operating expenses

Income from operations
Other revenues and gains
Other expenses and losses

Income before income taxes

Net income

Retained Earnings Statement




Balance Sheet

Current assets

Total current assets
Property, plant, and equipment



Total assets

Liabilities and Stockholders' Equity
Current liabilities

Total current liabilities $
Long-term liabilities

Total liabilities
Stockholders' equity

Total stockholders' equity

Total liabilities and stockholders' equity


Calculate the profit margin ratio and the gross profit rate. (Round to 1 decimal place, e.g. 2.5.)

Profit margin ratio %
Gross profit rate %

The vice-president of marketing and the director of human resources have developed a proposal whereby the company would compensate the sales force on a strictly commission basis using 20% of net sales. Given the increased incentive, they expect net sales to increase by 15%. As a result, they estimate that gross profit will increase by $37,605 and operating expenses by $62,595. Compute the expected new net income. (Hint: You do not need to prepare an income statement).

Net Income $

Then compute the revised profit margin ratio and gross profit rate. (Round to 1 decimal place, e.g. 2.5.)

Profit margin ratio %
Gross profit rate %

Solution Summary

The solution explains how to prepare financial statements