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Single-Step and Multiple-Step Income Statements, Profit Margins

Montaque Corporation's CEO announced preliminary 20X5 results including record gross sales of $5.675 billion and net income meeting the targeted 4% of net sales. While inventory levels increased 30% and advertising spending was $250.71 million, purchase discounts of $34.44 million and returns of $61.23 million offset higher freight costs. Selling, general and administrative expenses will follow historic allocation patterns.

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63 views

Single-Step and Multiple-Step Income Statements, Profit Margins

Montaque Corporation's CEO announced preliminary 20X5 results including record gross sales of $5.675 billion and net income meeting the targeted 4% of net sales. While inventory levels increased 30% and advertising spending was $250.71 million, purchase discounts of $34.44 million and returns of $61.23 million offset higher freight costs. Selling, general and administrative expenses will follow historic allocation patterns.

Uploaded by

Silence Existence
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Single-step and multiple-step income statements, profit margins I-05.

05

Synandre Montaque is the CEO of Montaque Corporation. The company recently held a webcast to an-
nounce preliminary results for the year ending December 31, 20X5. The webcast began with an opening
statement by Synandre, followed by a question and answer session from analysts and investors who utilized
a call-in Q&A phone line. Following is the transcript of the session:

Synandre Ladies and gentleman, thank you for participating today. There has been recent speculation
that Montaque Corporation's 20X5 reported results will fall short of previously announced
guidance. I wish to allay that fear by today offering some preliminary information about
20X5's results. Our official results will be released on February 19, when our independent
auditors issue their final report.

Synandre With that having been said, I am very pleased that we will be reporting record gross sales
of $5,675,000,000 for the reporting period. Our gross profit margin continues at a very fa-
vorable 44%, and our bottom line net income will equal the targeted 4% of net sales goal.
With that good news, I will be pleased to answer your questions.

Caller #1 Congratulations on those very good results. I did note that you referred to gross sales as
record-setting. But, there have been reports of product failures resulting in a very high rate
of return. Can you respond to that issue?

Synandre That is very plainly bunk; a rumor being spread by our competition. We continue to gain
market share across all areas. Our sales returns and allowances will come in at only 3% of
gross sales. Now, to be clear, we did offer improved credit terms to our key customers this
year, and our sales discounts will amount to 1.5% of gross sales.

Caller #2 You began the year with inventory of $425,000,000, and indicated that you desired to trim
that level. Did you accomplish that goal?

Synandre No. I am sorry to report that business conditions have required us to further increase our
inventory levels by 30%. However, this has resulted, we believe, in improved customer sat-
isfaction with our product availability.

Caller #3 Your competitors have reported significant increases in freight costs. Did you experience
similar problems?

Synandre We have been very fortunate to negotiate favorable terms on purchases. Our freight-in cost
of $55,000,000 was more than offset by purchase discounts of $34,444,000 and purchase
returns and allowances of $61,225,000.

Caller #4 How have recent tax law changes impacted the company?

Synandre While tax law changes have been grabbing headlines, our global tax strategy remains intact,
and our total tax expense for the year will be at the $100,000,000 level.

Caller #5 You have yet to comment on SG&A. Can you give those numbers some color?
Synandre I really cannot give you the specifics just yet, but I can give you some general guidance.
First, as you know, we carefully control SG&A. Our historic pattern shows that that our total
operating expenses break down as 60% selling, 35% general and administrative, and 5%
interest cost. We will match this historic pattern, even though we spent $250,710,000 on
advertising. The other selling expense categories of salaries / depreciation / utilities will al-
locate on a 60 / 10 / 30 ratio.

Caller #6 You are losing me here . . . I follow your selling expense, but how about general and
administrative costs?

Synandre Ok, you guys are really pressing me for the details. All I can tell you at this point is that the
general and administrative costs will consist of three categories: salaries / depreciation /
utilities. These will allocate out on a 50 / 30 / 20 basis. I cannot yet give you the specific
amounts. With that, it is time to close this webcast. Thank you for your attention. We look
forward to providing you with detailed income statements in the next few weeks. Good
day.

Assume you are a financial analyst. Your assignment is to a review the above transcript and prepare a report
for your clients that includes a preliminary view of how you think the income statement will appear, when
issued. Prepare both a multiple-step and single-step income statement for their review.

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