Case 3 Income statements

Case 3: Income Statement
Student’s Name
Institution
Explain the term cost of sales in your own words. Is likely that the balance sheet of this company includes inventory?
The cost of sales refers to the value of the process of production cutting across from the cost of all factors of production and eventually the cost of marketing for the same product. The balance sheet of the company, including the inventory, is expected since the inventory entails the number of current assets in terms of stock.
Gross profit (margin) is a key piece of financial information. Why is it so important?
Gross profit is an important aspect of financial information because it indicates the finical position of a company. Being a combination of the revenue and cost of sales, it displays what the business has been to gain in a particular financial period. It is a metric that can show if a business is progressing in the right direction in terms of profits. Mathematically:
Gross Profit = Revenue – Cost of Goods Available for Sale
For the Company ABC; GP = $ 525,000 – $ 200,000 = $ 325,000
Explain operating expenses? What does the term mean?
The term operating expenses refer to all the expenses that promote the production activities of the business, but not related to the production cost. Despite not being a part of the production expenses, the operating expenses are important in the setting of the price per unit of a product.
Does ABC Company have any employees? Explain.
The company has employees. This is because salaries have been included in the paying of expenses and salaries is a reward for labor.

There is an error in the income statement. Property taxes are overstated by $10,000. How is the income statement affected by a correction of property taxes?
The correction will decrease the total operating expenses by $10,000 and the new value becomes $8,000. As a result, therefore, the Net Income will increase by a value equivalent to the overstated value ($10,000) to $87,000.
What happens to net income if the company hires a new manager at a salary of $80,000?
The net income will decrease to $ -3,000. This leads to the fact that it is going to be a negative leading to a lack of income and the incoming of losses. The decline is due to the fact that the incoming salary leads to an increased expense.
Does the company own any equipment? Is it informative to also check the balance sheet to answer this question? Explain.
The company owns the equipment because the value of the depreciation has been included in the income statement. It was not a must to use the balance sheet to answer the question. It will only be needed if there was a need for obtaining the exact value of the equipment.
Does the company have debt? How much debt? Explain how the income statement and balance sheet provide answers to the questions?
The company has debts totaling to $14,750. The value of debts can be obtained from the balance sheet as the liabilities. In the income statement, it has been displayed by the appreciation of the debts.
How do we know that ABC Company is using the accrual basis of accounting? Hint: Do not forget to look at the balance sheet from the prior module.
The accrual basis of accounting calls for the revenue to be recorded when they are earned as it was recorded in the income statement (Ball, Gerakos, Linnainmaa & Nikolaev, 2016). Also in the establishment of net income, the revenue needs to be related to the operating expenses and this was the case (Ball, Gerakos, Linnainmaa & Nikolaev, 2016).
What happens to the income statement at the end of the period? Is it continuous or does it close (terminate)?
The income is continuous as it is used in the next financial year as the cash in hand brought forward.
References
Ball, R., Gerakos, J., Linnainmaa, J. T., & Nikolaev, V. (2016). Accruals, cash flows, and operating profitability in the crosssection of stock returns. Journal of Financial Economics, 121(1), 28-45.