Identify the errors in the following income statement:Curbstone Company Income Statement For the Year Ended August 31, 2019

Identify the errors in the following income statement:

Curbstone Company Income Statement For the Year Ended August 31, 2019

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,595,000 Cost of merchandise sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  6,110,000 Income from operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,485,000 Expenses: Selling expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $800,000 Administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 575,000 Delivery expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    425,000 Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   1,800,000 $ 685,000 Other expense: Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000 Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 640,000

Answer:

1. Deducting the cost of merchandise sold from sales yields gross profit (not income

from operations).

2. Deducting the total expenses from gross profit yields income from operations

(or operating income).

3. Interest revenue should be reported under the caption “Other revenue” and 

should be added to income from operations to arrive at net income.

4. The final amount on the income statement should be labeled net income, not 

gross profit.

A correct income statement is as follows:

Sales$8,595,000

Cost of merchandise sold6,110,000

Gross profit$2,485,000

Expenses:

Selling expenses$800,000

Administrative expenses575,000

Delivery expense425,000

Total expenses1,800,000

Income from operations$ 685,000

Other revenue:

Interest revenue45,000

Net income$ 730,000