Question

# Multiple-Step Income Statement and Profit Margin The following income statement items, arranged in alphabetical order, are...

1. Multiple-Step Income Statement and Profit Margin

The following income statement items, arranged in alphabetical order, are taken from the records of Shaw Corporation for the current year:

 Advertising expense \$1,500 Interest expense \$1,410 Commissions expense 2,652 Interest revenue 1,412 Cost of goods sold 29,269 Rent revenue 6,551 Depreciation expense - office building 2,760 Salaries and wages expense—office 11,508 Income tax expense 1,499 Sales revenue 48,090 Insurance expense - salesperson’s auto 2,232 Supplies expense—office 809

Required:

Assume that Shaw Corporation classifies all operating expenses into two categories: (1) selling and (2) general and administrative.

1. Prepare a multiple-step income statement for the current year.

 Shaw Corporation Income Statement For the Current Year \$ \$ Operating expenses: Selling expenses: \$ Total selling expenses \$ General and administrative expenses: \$ Total general and administrative expenses Total operating expenses \$ Other revenues and expenses: \$ Excess of other revenues over other expenses \$ \$

2. What advantage do you see in multi-step income statement?

3. Compute Shaw's profit margin. Round your answer to one decimal place.
%

4. Reflect on the profit margin determined above. What does this mean?

1) A multiple-step income statement for the current year is as follows:

Shaw Corporation

Income Statement

For the Current Year

\$ \$
Sales Revenue        48,090
Cost of goods sold         29,269
Gross Profit        18,821
Less: Operating Expenses
Selling expenses:
Commissions expense        2,652
Insurance expense - salesperson’s auto        2,232
Supplies expense - office              809
Total selling expenses     7,193
Salaries and Wages Expenses      11,508
Depreciation Expenses - Office Expenses         2,760
Total general and administrative expenses        14,268
Total operating expenses         21,461
Operating Income        (2,640)
Rent Revenue     6,551
Interest revenue         1,412
Interest expense        (1,410)           6,553
Excess of other revenues over other expenses     3,913
Income tax expense          1,499
Net Income        \$2,414

2) The advantages of mutiple step income statement is that there will be break down of every expenses at every stage. It will get the proportion of the operating and non operating expenses , selling and administrative expenses and so on. The company will get an idea about the final amount of the profit or loss earned during the given period of time.

3) Shaw's profit margin is calculated as follows:

Shaw's profit margin = Net Profit / Sales Revenue *100

= \$2,414 / \$48,090 * 100

= 5.02%

Shaw's profit margin is 5.02%

4) The net profit margin 5.02% indicates that the company is eaning 5.02% profit from the total sales revenue of the company made during the year. So with the change in revenue the amount of the net income is also will change.

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