1. Explain the term cost of sales. is it likely that the balance sheet of this company includes inventory?
2. Gross profit (margin) is a key piece of financial information. Why is it so important?
3. Explain operating expenses? What does the term mean?
4. Does ABC Company have any employees? Explain.
5. 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?
6. What happens to net income if the company hires a new manager at a salary of $80,000?
7. Does the company own any equipment? Is it informative to also check the balance sheet to answer this question? Explain.
8. Does the company have debt? How much debt? Explain how the income statement and balance sheet provide answers to the questions?
9. 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.
10. What happens to income statement at the end of the period? Is it continuous or does it close (terminate)?

ABC Company Income Statement For the Period Ending December 31, 20XX Revenues S 525,000 Cost of sales 200,000 Gross profit S 325,000 Operating expenses Salaries S 100,000 Lease for office 30,000 Advertising and promotion 24,000 Utiliies 12,750 Property taxes 18,000 Payroll taxes 11,500 Insurance 8,000 Depreciation 20,000 Miscellaneous expenses 9,000 Total operating expenses S 233,250 Operating income S 91,750 Interest income S 250 Interest expense 15,000 Net interest expense S 14,750 Net income S 77,000