Mastery Problem: Prepare a Multiple-Step Income Statement

Income statement format

Recall that an income statement summarizes the revenues and expenses for a period of time. In the given sample, notice the use of dollar signs, underlines, and columns. Other than these things, the format of the income statement varies among companies. Sometimes a company will present more than one years data for comparison. You may also see this called the statement of earnings. But in general, there are two basic formats. The sample income statement is the single-step income statement format. The other format is the multiple-step income statement. This format subdivides the income statement into specific components or sections. This provides the user with subtotals that are very useful for analysis of the profitability of various aspects of the companys operations. This format is used most often but it varies slightly from company to company. Most include some or all of the following subtotals: gross profit (also referred to as gross margin), operating income, and net income.

Income Statement For the Year Ending December 31, 20Y8 Revenues Sales $210,000 Interest revenue 3,150 Total revenues $213,150 Expenses Cost of goods sold Sales salaries expense Depreciation expense Utilities expense Wages expense Interest expense $75,600 26,880 22,680 20,790 19,530 7,350 Total expenses -172,830 Net income $40,320 If a company prepares its income statement using the multiple-step format, it can expect net income to be net income in the single-step income statement format. The components of the multiple-step income statement Gross profit: Gross profit is the excess of sales revenue over cost of goods sold during the period. This section is of particular interest to retailers and manufacturing companies because it is a measure of the initial profit a company makes from selling its product. It can give insight into a company's pricing and purchasing policies. Which type of company would you expect not to report cost of goods sold and gross profit? Sales - Cost of goods sold Gross profit Operating income is calculated by deducting operating expenses from gross profit. Operating expenses are the expenses incurred during normal operations. These expenses are recurring in that they are generally incurred each period. Operating income measures the profit earned by Operating income: Gross profit - Operating expensesthe principal activities of the company. It is often used to compare the profitability of two or more companies or divisions within the same company. Which of the following would not be listed with operating expenses? Operating income Net income is the amount that the company has earned from all activities-operating and nonoperating. The excess of other revenues and expenses must first be calculated. The net Net income: Operating income +/- Excess of other amount is added to or subtracted from (depending on whether revenues or expenses are greater) operating income to determine net income. If other expenses exceed other revenues, the excess Will be operating income. A net loss occurs when total revenue and expensesexpenses have exceeded total revenues. Net income (loss) is transferred to Net income which you may recall is the accumulation of earnings that has not been distributed to stockholders