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Financial Statementsintermediate

Prepare an Income Statement

Practice preparing a multi-step income statement from a trial balance. Calculate gross profit, operating income, and net income with proper expense classification.

Problem Scenario

At December 31, Year 1, Delta Corp has the following adjusted trial balance data: Sales Revenue $450,000; Sales Returns and Allowances $12,000; Sales Discounts $8,000; Cost of Goods Sold $195,000; Salaries Expense $85,000; Rent Expense $36,000; Depreciation Expense $15,000; Utilities Expense $9,000; Insurance Expense $6,000; Interest Expense $4,000; Income Tax Expense $24,000.

Given Data

Sales Revenue$450,000

Sales Returns & Allowances$12,000

Sales Discounts$8,000

Cost of Goods Sold$195,000

Salaries Expense$85,000

Rent Expense$36,000

Depreciation Expense$15,000

Utilities Expense$9,000

Insurance Expense$6,000

Interest Expense$4,000

Income Tax Expense$24,000

Requirements

Calculate Net Sales
Calculate Gross Profit
Calculate Total Operating Expenses
Calculate Operating Income
Calculate Net Income
Prepare the complete multi-step income statement

Solution

Step 1:

Calculate Net Sales: Sales Revenue minus contra-revenue accounts. Net Sales = $450,000 - $12,000 - $8,000 = $430,000

Step 2:

Calculate Gross Profit: Net Sales minus Cost of Goods Sold. Gross Profit = $430,000 - $195,000 = $235,000

Step 3:

Calculate Total Operating Expenses: Sum all operating expenses (exclude interest and taxes). Operating Expenses = $85,000 + $36,000 + $15,000 + $9,000 + $6,000 = $151,000

Step 4:

Calculate Operating Income (Income from Operations): Gross Profit minus Operating Expenses. Operating Income = $235,000 - $151,000 = $84,000

Step 5:

Calculate Income Before Tax: Operating Income minus Interest Expense. Income Before Tax = $84,000 - $4,000 = $80,000

Step 6:

Calculate Net Income: Income Before Tax minus Income Tax Expense. Net Income = $80,000 - $24,000 = $56,000

Final Answer

Net Sales: $430,000. Gross Profit: $235,000. Operating Income: $84,000. Net Income: $56,000. Gross profit margin: 54.7%. Net profit margin: 13.0%.

Key Takeaways

✓A multi-step income statement separates operating from non-operating items
✓Net Sales = Gross Sales minus contra-revenue accounts (returns, allowances, discounts)
✓Gross Profit measures profitability of core product sales before operating costs
✓Interest expense is a non-operating expense reported below operating income
✓Income tax expense is the last deduction before arriving at net income

Common Errors to Avoid

✗Forgetting to subtract Sales Returns and Sales Discounts when calculating Net Sales
✗Including Interest Expense as an operating expense instead of a non-operating expense
✗Confusing a single-step format (all revenues minus all expenses) with the multi-step format
✗Including balance sheet items (assets, liabilities) on the income statement

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FAQs

Common questions about this problem type

A single-step income statement groups all revenues together and all expenses together, calculating net income in one step. A multi-step income statement calculates intermediate subtotals (gross profit, operating income) that provide more insight into the sources of profitability.

Interest expense is a non-operating expense. It appears below Operating Income in the "Other Revenues and Expenses" section. This separates the cost of financing from the results of core business operations.