Chapter 3: More on Financial Statement Formats

Income Statement Formats: Multiple-Step and Single-Step Income statements are financial statements that report a company's revenues and expenses over a period, ultimately arriving at net income. There are two primary formats for preparing income statements: multiple-step and single-step. Both formats present the same net income but differ in how they categorize and present revenues and expenses. 1. Multiple-Step Income Statement The multiple-step income statement provides detailed subtotals for different components, emphasizing gross profit, income from operations, and non-operating items. It is useful for analyzing operational efficiency by separating operating from non-operating activities. Key Sections of a Multiple-Step Income Statement: 1. Gross Profit: o Gross Profit = Net Sales − Cost of Goods Sold (COGS) o Gross profit reflects how efficiently a company is managing the cost of its products relative to sales. 2. Income from Operations: o Income from Operations = Gross Profit − Operating Expenses o Operating expenses are split into two categories:  Selling Expenses: Costs directly related to selling products (e.g., advertising, rent for stores, shipping).  General and Administrative Expenses: Overhead costs related to overall company management (e.g., office salaries, office supplies). 3. Non-Operating Activities: o Non-operating items include revenues and expenses not directly related to the core business, such as interest revenue, interest expense, and gains/losses from asset disposals. 4. Net Income: o Net Income = Income from Operations ± Non-Operating Items Example of a Multiple-Step Income Statement: Z-Mart Income Statement Net Sales Cost of Goods Sold (COGS) Gross Profit Operating Expenses - Selling Expenses $314,700 $230,400 $84,300 $20,000 Z-Mart Income Statement - General and Administrative Expenses $10,000 $30,000 Total Operating Expenses $54,300 Income from Operations Non-Operating Activities - Interest Revenue $500 - Interest Expense ($200) $300 Total Non-Operating Items $54,600 Net Income 2. Single-Step Income Statement The single-step income statement simplifies the presentation by grouping all revenues and all expenses together, regardless of whether they are operating or non-operating. It calculates net income in a single step by subtracting total expenses from total revenues. Key Sections of a Single-Step Income Statement: 1. Net Sales: o Same as in the multiple-step format. 2. Total Expenses: o This section includes all costs, such as:  Cost of Goods Sold (COGS)  Selling Expenses  General and Administrative Expenses  Any other expenses, including non-operating items like interest expense. 3. Net Income: o Net Income = Total Revenues − Total Expenses Example of a Single-Step Income Statement: Z-Mart Income Statement $314,700 Net Sales Total Expenses - Cost of Goods Sold (COGS) $230,400 - Selling Expenses $20,000 - General and Administrative Expenses $10,000 - Interest Expense $200 $260,600 Total Expenses $54,100 Net Income Classified Balance Sheet The classified balance sheet organizes assets, liabilities, and equity into categories. In a merchandiser's balance sheet, merchandise inventory is reported as a current asset, typically following accounts receivable. Inventory is considered less liquid than accounts receivable because it needs to be sold before being converted into cash. Partial Example of a Classified Balance Sheet (Current Assets Section): Z-Mart Classified Balance Sheet (Partial) Current Assets - Cash - Accounts Receivable - Merchandise Inventory - Prepaid Expenses Total Current Assets $10,000 $20,000 $30,000 $5,000 $65,000 Summary • • • Multiple-step income statement: Provides detailed insights by separating operating and non-operating activities, offering useful subtotals for gross profit and operating income. Single-step income statement: Simplifies the presentation by grouping all revenues and expenses, providing a straightforward view of net income. Classified balance sheet: Categorizes assets and liabilities, with merchandise inventory shown as a current asset in a merchandiser's balance sheet.