Date:
To: Audit Supervisor of Lads and Lassies
From: Jian Liu
Subject: Lads and Lassies (L&L)’s Income Statement

Background:

Lads and Lassies (L&L) has the following information for the income statement presentation: (1) net sales of $74.5 million in fiscal 2005 and $86.5 million in fiscal 2006. (2) Gross profit increased from $28 million in fiscal 2005 to $30.4 million in fiscal 2006. (3) Cost of sales increased from $46.5 million in fiscal 2005 to $56.1 million in fiscal 2006. (4) A gain of $1.7 million on Sale of Corporate Headquarters. (5) Class Action Settlement of $2.7 million proceeds.

Problem: Based on the given information, determine the appropriate income statement presentation (sales, cost of sales, gross profit, operating income or expense, non-operating income or expense).

A statement of the problem/issue/question:

What rules or standards are in effect that give consideration to the separate presentation of product and service revenue and related cost of revenue? In your opinion, why is these rules or standards in effect? Based on your decision with respect to the presentation of sales on the income statement, how should “cost of product” be represented? Why is gross profit typically calculated and presented on income statements? What decision-useful information does gross profit convey? Is gain on the sale of a productive asset typically a component of operating income? Should settlement’s such as that described in this case be considered part of operating income?

Relevant Guidance: ASC 225-10-S99-2 (Regulation S-X Rule 5-03, Income Statements)
ASC 225-20-45-16 (Presentation of Unusual or Infrequently Occurring Items)

Application:

ASC 225-10-S99-2 (Regulation S-X Rule 5-03, Income Statements) are in effect that give consideration to the separate presentation of product and service and related cost of