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MULTI-STEP INCOME STATEMENT
Key Terms and Concepts to Know
Single-Step Income Statement
- Total revenue – total expenses = Net Income Multi-Step Income Statement
- Separates revenues into operating and non-operating
- Separates expenses into cost of goods sold, operating and non-operating
- May further divides Operating Expenses into Selling Expenses and Administrative Expenses
- Adds subtotals to increase usefulness of income statement Comprehensive Income Statement
- Certain other gains or losses are not included in net income but are included in the more inclusive income measure, Comprehensive Income
- Gains or losses result from adjustments such as marking certain assets to their fair values Cost of Goods Sold:
- Inventory that has been sold becomes an expense, Cost of Goods Sold, in the period of sale. Gross Profit:
- Gross Margin = Gross Profit = Net Sales – Cost of Goods Sold
- Gross Margin ratio = Gross Margin / Net Sales
- First key indicator of profitability
Key Topics to Know
Single-Step Income Statement
- Very simple format: o One section for total revenue, including operating and non-operating revenues o Second section for total expenses, including operating and non-operating expenses o Single step is to subtract total expenses from total revenues to determine net income
Multi-Step Income Statement
- Highlights the components of net income: o Separates revenues into operating and non-operating o Separates expenses into cost of goods sold, operating and non-operating o May further divides Operating Expenses into Selling Expenses and Administrative Expenses o Operating results are reported as Income from Operations o Adds subtotals to increase usefulness of income statement
- More complex format: o Net Sales = Sales + transportation-in – sales returns and allowances – sales discounts o Gross Profit or Gross Margin = Net Sales – Cost of Goods sold o Operating Income = Gross Profit – Operating Expenses (end of operating revenues and expenses) o Net Income = Operating Income + Non-operating Revenues – Non- operating Expenses – Income Tax Expense o Comprehensive Income = Net Income + Other Comprehensive Income – Other Comprehensive Expenses Key changes compared to the single-step income statement include:
- Gross-to-Net Sales to account for contra-revenue accounts
- Gross Profit to report the margin or profit remaining after covering the cost of merchandise sold that is available to cover operating expenses
- May also separating Operating Expenses into Selling Expenses and Administrative Expenses to provide an additional level detail
Solution # a)
G Company
Income Statement
For the year ended December 31
Revenues
Net Sales $417,
Gain on disposal of store equipment 3,
Total revenues $420,
Expenses:
Cost of goods sold $210,
Sales salaries expense 38,
Depreciation expense—building 40 ,
Advertising expense 12,
Office supplies expense 3,
Interest expense 1,
Total expenses 304,
Net income $115,
b)
G Company
Income Statement
For the year ended December 31
Sales $450,
Less: Sales discounts $8,
Sales returns and allowances 24,500 32,
Net sales $417,
Cost of goods sold 210,
Gross profit 207,
Operating expenses
Sales salaries expense $38,
Depreciation expense—building 40 ,
Advertising expense 12,
Office supplies expense 3,
Total operating expenses 93,
Income from operations 113,
Other revenues and gains (expenses
and losses)
Gain on disposal of store equipment 3,
Interest expense (1,000) 2,
Net income $115,
Practice Problem # Following are 6 statements about income statements.
- ________________________ expenses are those costs that support a company's overall operations and include expenses related to accounting, human resource management, and financial management.
- A _____________________ income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.
- A ______________________ income statement includes cost of goods sold as another expense and shows only one subtotal for total expenses.
- Non-operating activities reported on the income statement that includes interest, dividend, and rent revenues, and gains from asset disposals are called _____________________________.
- Non-operating activities reported on the income statement that includes interest expense, losses from asset disposals, and casualty losses are called ____________________________.
- When a company has no reportable non-operating activities, its income from operations is reported as ___________________. Required: Fill in the blanks with the correct answers.
Practice Problem # T Company reported the following information on its income statement for the first quarter of the year. January February March Sales $375,000 $750,000? Sales returns and allowances 32,000? 25, Sales discounts 12,000 9,000 15, Net sales? 736,000? Cost of merchandise sold 255,000? 620, Gross profit? 310,000 185, Required: Calculate the missing information. Practice Problem # A multi-step income statement showed net sales of $870,000, cost of goods sold of $376,000, and total operating expenses of $330,000 for the fiscal year ended December 31, 2016. Required: a) What was the gross profit? b) What was the net income from operations?
Revised Summer 2016
Multiple Choice Questions
1. An income statement that includes cost of goods sold as another expense and
shows only one subtotal for total expenses is a: a) Single-step income statement. b) Balanced income statement. c) Multiple-step income statement. d) Simplified income statement.
2. Expenses that support the overall operations of a business and include the
expenses relating to accounting, human resource management, and financial management are called: a) Cost of goods sold b) Operating expenses. c) Non-operating expenses d) Comprehensive expenses
3. P Company had cash sales of $94,275, credit sales of $83,450, sales returns
and allowances of $1,700, and sales discounts of $3,475. P Company's net sales for this period equal: a) $94,275. b) $174,250. c) $172,550. d) $176,025.
4. Multiple-step income statements:
a) Are required by the FASB and IASB. b) List cost of goods sold as an operating expense. c) Are only used by service businesses d) Contain more detail than a simple listing of revenues and expenses.
5. S Company has net sales of $752,000 and cost of goods sold of $543,000. Its
net income is $17,530. The company's gross margin and operating expenses, respectively, are: a) $209,000 and $191, b) $191,470 and $209, c) $525,470 and $227, d) $227,000 and $525,
Revised Summer 2016
6. G Company^ had $800,000 in net sales, $350,000 in gross profit, and $200,
in operating expenses. Cost of goods sold equals: a) $150,000. b) $450,000. c) $800,000. d) $350,000.
7. C Company had $800,000 in sales, sales discounts of $12,000, sales returns
and allowances of $18,000, cost of goods sold of $380,000, and $275,000 in operating expenses. Gross profit equals: a) $770,000. b) $115,000. c) $390,000. d) $402,000.
8. Which of the following would be classified as Other Income or Other Expense?
a) Advertising Expense b) Interest Expense c) Transportation Out d) Cost of merchandise sold
9. Gross Margin is calculated as:
a) Sales less cost of merchandise sold b) Sales less merchandise inventory c) Sales less expenses d) Sales less operating expenses
10. A Company’s gross profit ratio has steadily declined for 5 years while the net
profit ratio has remained constant. The most likely reason for this pattern is: a) Cost of merchandise sold and operating expenses both increased each year b) Selling price and operating expenses have both decreased each year c) Cost of merchandise sold and operating expenses both decreased each year d) Selling price decreased and operating expenses increased each year
Revised Summer 2016 Practice Problem #
- Operating
- Multiple-step
- Single-step
- Other revenues and gains
- Other expenses and losses
- Net income Practice Problem # January Sales $375,
- Sales Returns & Allowances (32,000)
- Sales Discounts (12,000) Net Sales 331,
- Cost of Merchandise Sold (255,000) Gross Profit $76, February Sales $750,000 750,000 – x – 9,000 = 736,
- Sales Returns & Allowances x 741,000 – x = 736,
- Sales Discounts (9,000) x = 5, Net Sales 736,000 736,000 – y = 310,
- Cost of Merchandise Sold y y = 426, Gross Profit $310, March Sales X x – 25,000 – 15,000 = y
- Sales Returns & Allowances (25,000)
- Sales Discounts (15,000) y – 620,000 = 185, Net Sales Y y = 805,
- Cost of Merchandise Sold (620,000) x = 845, Gross Profit 185,
- Practice Problem #
- Cash $34, Debit Credit
- Merchandise inventory 32,
- Inventory returns estimated 4,
- Store equipment 75,9
- Accumulated depreciation—store equipment $22,
- Office equipment 60,
- Accumulated depreciation—office equipment 15,
- Accounts payable 35,
- Sales refund payable 7,
- Notes payable 10,
- Common stock 1,
- Retained earnings 109,
- Dividends 48,
- Sales 325,
- Sales discounts 6,
- Sales returns and allowances 16,
- Cost of goods sold 195,
- Selling expenses 32,
- General and administrative expenses 19,
- Interest expense
- Total $524,700 $524,
- Practice Problem #
- Net Sales $870,
- Cost of Goods Sold 376,
- Gross Margin 494,
- Operating Expenses 330,
- Net Income from Operations $164,
Solutions to Multiple Choice Questions
1. A
2. B
3. C
4. D
5. A
6. B
7. C
8. B
9. A
10. B
