A multiple step income statement helps in analyzing an entity's performance since it communicates the results of the core functions from other activities separately. The format presents revenues, expenses, losses and gains into the operating and the non-operating sections respectively. This form of the income statement has many details in comparison to the single step income statement hence it is given preference. However, it is important to ensure the preparation of the income statement is correct.
A multiple step income statement presents the statement of comprehensive income into the operating and the non-operating sections. From Simon Company income statement the first part indicates the operating section. This section shows the revenues and expenses that are related to the core business of the company. A computation of the gross profit figure $310,000, and income from operations &88,000 is done and shown under the operating section. In a multi-step income statement, any revenue that relates to the functioning of the business is added together and displayed at the top of the statement of comprehensive income. This method of preparing the income statement further classifies the expenses incurred from operations into the cost of sales, expenditures incurred from selling and expenses for administrative purposes. These expenses from operations are clearly presented in the income statement for Simon Company where the cost of sales was $555,000, total selling expenses were $145,000 while the sum of administrative expenses was $77,000. Costs of goods sold is however excluded from the operating expenses since it gives the users of financial statements a means to analyze sales and the frequency of purchasing.
The expenses that are directly related to the sales made are referred to as the selling expenses. From the income statement for Simon Company, these included advertisement costs of $13, 000, salaries and commissions paid to salespersons of $89,000 and freight out on merchandise of $33,000. Expenses that are not related to the primary business of the company but are associated with general business administration are the administrative costs. Simon Company incurred $12,000 on utilities,$47,000 on office salaries and a rent expense of $18,000 as administrative expenses in the year 2017.
If a company earns other incomes that are not related to its core business activity, it is presented as other revenues and expenses under the non-operating section. The rent income of $4,000, dividends of $18,000 and interest expense $2,000 from Simon Company all represent revenues and expenditures presented in the non-operating section. The company received revenue from rent yet this was not its primary business, and this is why such income is recorded as other income.
The income statement for Simon Company shows there are three steps for computing the net income $.72,000. Firstly a computation for the gross profit figure is determined by subtracting the cost of sales from the net sales. Secondly, the value of the income from operations is calculated. The difference between the gross profit in the first step and the operating expenses gives the income from operations. The operating expenses include only those that are related to the company's core activities however costs that are incurred one time or investments that the company holds are not considered. The final step involves determining the net income which is the net of income from operations and any other non-operating income.
There are benefits associated with preparing the income statement using this method compared to the single-step income statement. Firstly, it shows the gross profit figure which is used to compute the gross profit margin a key liquidity ratio that is monitored by many of the financial statements users. A comparison of the gross profit margin made with previous gross profit margins of a company or those of other companies in the same industry in assessing performance. Secondly, it also indicates the amount of income from operations which shows the revenue a firm earns from its principle business. Lastly, it reports the important figure of the net profit which portrays the overall performance of a company which may be a profit or a loss. Despite the mentioned benefits, the method of presentation may at times lead to misleading results due to the deliberate shift of expenses thus affecting the gross profit.
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