Chapman 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, 2012, these accounts appeared in its adjusted trial balance.

Additional data: Notes payable are due in 2016.
Instructions

(a) Prepare a multiple-step income statement, a retained earnings statement, and a classified balance sheet.

(b) Calculate the profit margin ratio and the gross profit rate.

(c) 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. Given the increased incentive, they expect net sales to increase by 15%.
As a result, they estimate that gross profit will increase by $40,443 and expenses by $58,600. Compute the expected new net income. (Hint: You do not need to prepare an income statement.) Then, compute the revised profit margin ratio and gross profit rate. Comment on the effect that this plan would have on net income and on the ratios, and evaluate the merit of this proposal. (Ignore income tax effects.)

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Accounts Payable Accounts Receivable Accumulated Depreciation-Equipment Cash Common Stock Cost of Goods Sold Freight-out $ 26,800 17,200 68,000 8,000 35,000 614,300 6,200