Chapter 7
Inventory: Merchandising Transactions
186
A
multistep income statement
is an income statement that further divides specific revenues and
expenses to show subtotals like gross profit, operating expenses, and operating income.This format
classifies expenses by
function
, which means that related expenses are grouped together. Also,
important measures such as gross profit and operating income are clearly shown. A multistep
income statement is illustrated in Figure 7.20.
Tools 4U
Income Statement
For the Year Ended December 31, 2016
Sales Revenue
$200,000
Less: Sales Returns and Allowances
$4,000
Sales Discounts
2,000
(6,000)
Net Sales
194,000
Cost of Goods Sold
100,000
Gross Profit
94,000
Operating Expenses
Depreciation Expense
5,000
Rent Expense
10,000
Salaries Expense
40,000
Supplies Expense
7,000
Utilities Expense
6,000
Total Operating Expenses
68,000
Operating Income
26,000
Other Revenue and Expenses
Interest Revenue
8,000
Interest Expense
(4,000)
4,000
Net Income
$30,000
________________
figure 7.20
The multistep income statement further groups the revenues and expenses that are not part of the
main operations of the business, such as interest expense, interest revenue or loss from a lawsuit,
under a separate category called Other Revenue and Expenses.
Operating expenses can be further divided by function into selling and administrative expenses.
Selling expenses are those related to actually selling inventory. Examples include sales salaries,
rent for the retail space and advertising. Administrative expenses are those related to running the
business, which are not directly tied to selling inventory. Examples include office salaries, office
supplies and depreciation of office equipment.
Using the above example, suppose depreciation is solely on display equipment for inventory and
supplies are just office supplies. Salaries, rent and utilities are allocated 80% to selling and 20% to
administrative. With this new information, the income statement can be presented as shown in
1. Calculate Net Sales
and Gross Profit
2.
Calculate
Operating Income
3.
Calculate non-
operating activities
and Net Income
