The Management of Small Corporation (A Privately Held Canadian Entity)

Essay

The management of Small Corporation (a privately held Canadian entity) has asked you to critique its income statement for the current year. It was prepared in single-step form by an employee as shown below. List and number your criticisms of the employee's effort. Do not look for math errors or cite the arithmetic effects of reclassifying items.
Small Corporation
Statement of Earnings
August 31, 2010 $\begin{array} { | l | l | l | } \hline \text { Sales less returns and allowances } & & \$ 4,720,000 \\\hline \text { Deduct cost of goods sold: } & & \\\hline \text { Inventory, August } 31,2010 & \$ 440,000 & \\\hline \text { Add purchases } & 2,930,000 & \\\hline \text { Freight-out (on goods shipped to customers) } & 180,000 & \\\hline \text { Goods available for sale } & 3,550,000 & \\\hline \text { Inventory, September 1, 2009 } & 377,000 & \\\hline \text { Cost of sales } & & 3,173,000 \\\hline \text { Operating profit } & & \$ 1,547,000 \\\hline & & \\\hline \text { Deduct expenses: } & & \\\hline \text { Salaries and related employment costs } & \$ 610,000 & \\\hline \text { Utilities } & 105,000 & \\\hline \text { Insurance } & 44,000 & \\\hline \text { Bad debt expense } & 53,500 & \\\hline \text { Freight-in (on purchases) } & 101,200 & \\\hline \text { Sales taxes } & 94,400 & \\\hline \text { Taxes other than on sales and on income } & 98,000 & \\\hline \text { Loss on uninsured flood damage (infrequent and unusual in this case) } & 200,000 & \\\hline \text { Miscellaneous expenses } & 87,900 & \\\hline \text { Total expenses } & & 1,394,000 \\\hline \text { Net profit before tax } & & \$ 153,000 \\\hline \text { Income tax } && 71,000 \\\hline \text { Net profit } && 82,000 \\\hline\end{array}$