I.

Forms of Financial Statements

A. MULTIPLE-STEP INCOME STATEMENT
1. Includes sales revenue, cost of goods sold and gross profit
sections.
a) Net Sales = Sales Sales returns and allowances and Sales
Discounts.
Note: Freight-out is a selling expensenot a contra account to
sales.
b) Gross Profit = Net sales Cost of goods sold. An example
showing the determination of gross profit as follows:
Net sales 460,000
- Cost of goods sold - 316,000
= Gross profit 144,000

2. Operating expenses may be subdivided into:

a) Selling Expenses.
b) Administrative Expenses.
3. Additional nonoperating sections may be added for:
a) Nonoperating sections are reported after income from
operations and are classified in two sections.
b) Revenues and expenses resulting from secondary or auxiliary
operations.
1) Other revenues and gains.
2) Other expenses and losses.
c) Gains and losses unrelated to operations. Other Revenues and
Gains in one column and Other Expenses and Losses in the
other column.

4. MULTIPLE-STEP VS. SINGLE-STEP INCOME STATEMENT

showing the formulas for the multiple-step income statement:
a) Net sales Cost of goods sold = Gross profit
b) Operating expenses = Income from operations
c) + Other revenues/gains Other expenses/losses =
Net income or Net loss.
5. An example for the determination of net incomefrom gross profit
as follows:
 Gross profit 144,000
- Total operating expenses - 114,000
= Income from operations 30,000
+ Other revenues and gains + 3,600
- Other expenses and losses - 2,000
= Net income $31,600

B. SINGLE-STEP INCOME STATEMENT

1. All data are classified under two categories:
a) (1) Revenues
b) (2) Expenses
2. Only one step is required in determining net income or net loss
Revenues Expenses = Net Income.
3. Two primary reasons for using a single step format:
a) (1) A company does not realize any type of profit or income
until total revenues exceed total expenses, so it makes sense
to divide the statement into two categories.
b) (2) The format is simpler and easier to read than the multiple-
step format.

C. CLASSIFIED BALANCE SHEET.

1. Current assets are listed in the order of liquidity.
2. Merchandise Inventory is less liquid than accounts receivable
because the goods must first be sold and then collection must be
made from the customer.
3. Merchandise Inventory is reported as a current asset
immediately below accounts receivable.