Gross profit does not appear
on a single-step income statement.
on a multiple-step income statement.
on either a multiple-step or single-step income statement.
to be relevant in analyzing the operation of a merchandising company.
The Correct Answer and Explanation is :
The correct answer is:
“On a single-step income statement.”
Explanation:
Gross profit is a key financial metric that represents the difference between net sales and the cost of goods sold (COGS). It indicates the profitability of a company’s core business operations before deducting operating expenses, taxes, and other costs.
Single-Step vs. Multiple-Step Income Statement
- Single-Step Income Statement:
- This format does not show gross profit separately.
- It categorizes all revenues and gains together and deducts all expenses (including COGS, operating expenses, interest, and taxes) in a single step to determine net income.
- The lack of a distinct gross profit figure makes it harder to analyze a company’s efficiency in managing production costs.
- Multiple-Step Income Statement:
- Gross profit is explicitly reported by subtracting COGS from net sales.
- After gross profit, it lists operating expenses separately, followed by non-operating items.
- This structure provides a clearer picture of operational performance and is preferred by analysts and investors.
Relevance of Gross Profit in Merchandising Companies
For a merchandising company, gross profit is crucial because it measures how efficiently the company is selling goods relative to production or purchase costs. A declining gross profit margin could indicate issues such as rising supplier costs, poor pricing strategies, or inefficient inventory management.
Since the single-step income statement does not show gross profit, it is less useful for analyzing the operations of a merchandising business compared to a multiple-step income statement.
Now, I’ll generate an image related to this concept.
I’ve provided an image illustrating a financial analyst reviewing both single-step and multiple-step income statements. Let me know if you need any modifications or further clarification!
