Question

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?

Answer 1

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:
Advertising expense	1,500
Commissions expense	2,652
Insurance expense - salesperson’s auto	2,232
Supplies expense - office	809
Total selling expenses		7,193
General and administrative expenses:
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)
Add: Other revenues and expenses:
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.