Preparing A Multiple-Step Income Statement

Preparing A Multiplestep Income Statementduemay 22 1159 Pmnot Submi

Preparing a Multipleâ€Step Income Statement Due May 22, 11:59 PM Not Submitted POINTS 8 Practice/Simulation/Homework/Game 20 Objectives: Instructions Assignment Files Grading Purpose of Assignment The purpose of this assignment is to help you become familiar with the parts of the multipleâ€step income statement. Assignment Steps Resources: Financial Accounting: Tools for Business Decision Making Scenario: An inexperienced accountant prepared this condensed income statement for Simon Company, a retail firm that has been in business for a number of years. SIMON COMPANY Income Statement For the Year Ended December 31, 2017 Revenues Net sales $850,000 Other revenues 22,,000 Cost of goods sold 555,000 Gross profit 317,000 Operating expenses Selling expenses 109,000 Administrative expenses 103,,000 Net earnings $105,000 As an experienced, knowledgeable accountant, you review the statement and determine the following facts: Net sales consist of: sales $911,000, less freight-out on merchandise sold $33,000, and sales returns and allowances $28,000. Other revenues consist of sales discounts $18,000 and rent revenue $4,000. Selling expenses consist of salespersons' salaries $80,000, depreciation on equipment $10,000, advertising $13,000, and sales commissions $6,000. The commissions represent commissions paid. At December 21, $3,000 of commissions have been earned by salespersons but have not been paid. All compensation should be recorded as Salaries and Wages Expense. Administrative expenses consist of office salaries $47,000, dividends $18,000, utilities $12,000, interest expense $2,000, and rent expense $24,000, which includes prepayments totaling $6,000 for the first quarter of 2018. Prepare a detailed multi-step income statement with a brief explanation of 700 words. Assume a 25% tax rate. Show your work on the Excel ® spreadsheet and submit with your explanation. Click the Assignment Files tab to submit your assignment. Materials Preparing a Multipleâ€Step Income Statement Grading Guide Week 3 Excel® Spreadsheet

Paper For Above instruction

The preparation of a multi-step income statement is a vital skill in accounting, providing a comprehensive view of a firm's financial performance by separating operating and non-operating activities. This paper explains the detailed process of constructing a multi-step income statement for Simon Company based on the provided data, including necessary adjustments to accurately depict revenues, expenses, gross profit, operating income, and net income, all while applying a 25% tax rate. The goal is to develop a clear, accurate, and informative statement that reflects the company's financial health and operational efficiency.

To commence, understanding the distinction between gross sales and net sales is fundamental. The company's gross sales are $911,000. Adjustments such as freight-out ($33,000) and sales returns and allowances ($28,000) are deducted from gross sales to compute net sales:

  • Gross Sales: $911,000
  • Less Freight-Out: $33,000
  • Less Sales Returns and Allowances: $28,000

Thus, net sales are $(911,000 - 33,000 - 28,000) = $850,000, which aligns with the provided net sales figure.

Next, other revenues include sales discounts ($18,000) and rent revenue ($4,000). Combining these gives other revenues of $22,000 ($18,000 + $4,000). It’s crucial to note that sales discounts are reductions on sales, not miscellaneous income, but for clarity, they are included under other revenues as per the scenario.

The cost of goods sold (COGS) is given as $555,000, leading to gross profit:

  • Gross Profit = Net Sales - COGS = $850,000 - $555,000 = $295,000.

Moving to operating expenses, selling expenses total $109,000, composed of various components:

  • Salespersons’ Salaries: $80,000
  • Depreciation on Equipment: $10,000
  • Advertising: $13,000
  • Sales Commissions: $6,000

It's important to recognize that $3,000 of commissions have been earned but not paid as of December 21; thus, this accrued expense should be included in expenses—specifically, within sales commissions or salaries and wages—reflecting the obligation incurred.

Administrative expenses amount to $103,000 as provided, with detailed components:

  • Office Salaries: $47,000
  • Dividends: $18,000
  • Utilities: $12,000
  • Interest Expense: $2,000
  • Rent Expense: $24,000 (including prepayments for the first quarter of 2018, totaling $6,000)

Since dividends are non-operating expenses distributed to shareholders, they are not included in the operating expenses but are deducted after operating income to compute net income.

An essential aspect of assembling the income statement is adjusting the rent expense for prepayments. The $6,000 prepayment for the first quarter of 2018 should not be deducted in 2017 since it relates to a future period. Therefore, only the rent expense attributable to 2017, totaling $18,000 ($24,000 - $6,000 prepayment), is recognized as an expense.

Total operating expenses are calculated as:

  • Selling Expenses: $109,000
  • Administrative Expenses (excluding rent prepayment): $97,000 ($47,000 + $12,000 + $2,000 + $18,000 for rent)

Summing these yields total operating expenses of $206,000.

Operating income is therefore:

  • Gross Profit ($295,000) minus Operating Expenses ($206,000) = $89,000

Non-operating expenses include interest expense ($2,000). The calculation of income before taxes:

  • Operating Income: $89,000
  • Less Interest Expense: $2,000

Resulting in income before tax of $87,000. Applying the 25% tax rate:

  • Income Tax Expense = 25% of $87,000 = $21,750

Finally, net income is:

  • Income Before Tax minus Income Tax Expense = $87,000 - $21,750 = $65,250

This multi-step income statement provides a detailed view of Simon Company's financial performance by clearly segregating each component of income and expense, ensuring accuracy and transparency. Proper preparation reflects a professional approach, giving stakeholders insight into operational efficiency and profitability.

References

  • Horngren, C. T., Sundem, G. L., Elliott, J. A., & Philpot, T. (2015). Financial & Managerial Accounting (15th ed.). Pearson.
  • Wild, J. J., Subramanyam, K. R., & Halsey, R. F. (2014). Financial Statement Analysis (11th ed.). McGraw-Hill Education.
  • Chen, S., & Uccellini, M. (2018). Understanding Financial Statements for Better Business Decisions. Journal of Business & Finance, 24(3), 45-59.
  • International Financial Reporting Standards (IFRS). (2020). IFRS Standards and Interpretations. IFRS Foundation.
  • Financial Accounting Standards Board (FASB). (2019). Accounting Standards Codification (ASC). FASB.
  • Gibson, C. H. (2013). Financial Reporting & Analysis (13th ed.). South-Western College Pub.
  • White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. John Wiley & Sons.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2016). Fundamentals of Corporate Finance. McGraw-Hill Education.
  • Siegel, J. G., & Shim, J. K. (2014). Financial Management. Barron’s Educational Series.
  • Knopf, L. W. (2013). Principles of General Accounting. Routledge.

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