91Ó°ÊÓ

(Multiple-Step and Single-Step Statements) Two accountants for the firm of Elwes and Wright are arguing about the merits of presenting an income statement in a multiple-step versus a single-step format. The discussion involves the following 2017 information related to P. Bride Company (\(000 omitted).

Administrative expense

Officers’ salaries \)4,900

Depreciation of office furniture and equipment \(3,960

Cost of goods sold \)60,570

Rent revenue \(17,230

Selling expense

Delivery expense \)2,690

Sales commissions \(7,980

Depreciation of sales equipment \)6,480

Sales revenue \(96,500

Income tax \)9,070

Interest expense $1,860

Instructions

1. Prepare an income statement for the year 2017 using the multiple-step form. Common shares outstanding for 2017 total 40,550 (000 omitted).
2. Prepare an income statement for the year 2017 using the single-step form.
3. Which one do you prefer? Discuss.

Step by step solution

01

Meaning of Depreciation

Depreciation refers to allocating the cost of physical assets for the useful life of an asset. Since there are no cash outflows, depreciation is considered a non-cash charge.

02

Preparing a Multiple-step Income Statement

Multi-Step Income Statement
For the Year Ended 2017
Sales Revenue		$96,500
Cost of Goods Sold		($60,570)
Gross Profits (A)		$35,930
Administrative Expenses
Officers Salaries	$4,900
Depreciation of Office furniture	$3.960
Selling Expense
Delivery Expense	$2,690
Sales Commission	$7,980
Depreciation of Sales Equipment	$6,480
Total Operating Expenses (B)		$26,010
Operating Income (A-B)		$9,920
Non-Operating Income (Loss)
Rent Revenue		$17,230
Interest Expense		($1,860)
Income before Income Tax		$25,290
Income Tax		($9,070)
Net Income		$16,220
Earnings per Share		$0.40

Working Notes

1. Calculation of earnings per share

$\begin{array}{rcl}\mathbf{Earnings}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}& \mathbf{=}& \mathbf{Net}\mathbf{}\mathbf{income}\mathbf{÷}\mathbf{Outstanding}\mathbf{}\mathbf{Common}\mathbf{}\mathbf{Stock}\\ & \mathbf{=}& \mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{220}\mathbf{÷}\mathbf{40}\mathbf{,}\mathbf{550}\mathbf{}\mathbf{shares}\\ & \mathbf{=}& \mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{40}\end{array}$

03

Preparing a Single-step Income Statement

Income Statement
For the Year Ended December 31, 2017
Revenues
Sales Revenue	$96,500
Rent Revenue	$17,230
Total Revenues (A)		$113,730
Expenses
Cost of Goods Sold	$60,570
Officers Salaries	$4,900
Delivery Expenses	$2,690
Sales Commission	$7,980
Depreciation Expense	$10,440
Interest Expense	$1,860
Total Expenses (B)		$88,440
Income before income tax (A-B)		$25,290
Income Tax		($9,070)
Net Income		$16,220
Earnings per share		$0.40

Working Notes

1. Calculation of Earnings per share

$\begin{array}{rcl}\mathbf{Earnings}\mathbf{}\mathbf{per}\mathbf{}\mathbf{share}& \mathbf{=}& \mathbf{Net}\mathbf{}\mathbf{Income}\mathbf{÷}\mathbf{Outstanding}\mathbf{}\mathbf{Common}\mathbf{}\mathbf{Stock}\\ & \mathbf{=}& \mathbf{\$}\mathbf{16}\mathbf{,}\mathbf{220}\mathbf{÷}\mathbf{40}\mathbf{,}\mathbf{550}\mathbf{}\mathbf{shares}\\ & \mathbf{=}& \mathbf{\$}\mathbf{0}\mathbf{.}\mathbf{40}\end{array}$

04

Explanation for preference

A multi-step income statement is preferable to a single-step Income Statement because it provides complete information regarding operating and non-operating business activities.

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