Sales Revenue 1,500,000 2. Sales Returns and Allowances 1,485 3. Beginning Stock 1,750 4. Purchases 100,145 5. Salaries Expense 3,800 6. Rent Expense 7,550 7. Advertising Expense 18,500 8. Depreciation Expense 8,000 9. Delivery Expense 14,500 10. Utilities Expense 112 11. Supplies Expense 1,475 12. Sales Discount 474 13. Purchase Discount 455 14. Closing Stock 332 15. Freight ln142 16. Interest Expense 2,740 17. Interest Revenue 2,200 18. Income Tax Expense 7,580 Prepare the multi-step income statement for Egotist Ltd 2022.
The Correct Answer and Explanation is:
Here is the multi-step income statement for Egotist Ltd for the year ended 2022:
Egotist Ltd
Multi-Step Income Statement
For the Year Ended December 31, 2022
Sales Revenue:
- Sales Revenue: \$1,500,000
- Less: Sales Returns and Allowances: (\$1,485)
- Less: Sales Discounts: (\$474)
Net Sales: \$1,498,041
Cost of Goods Sold (COGS):
- Beginning Inventory: \$1,750
- Add: Purchases: \$100,145
- Add: Freight-In: \$142
- Less: Purchase Discounts: (\$455)
- Goods Available for Sale: \$101,582
- Less: Ending Inventory: (\$332)
Cost of Goods Sold: \$101,250
Gross Profit: \$1,498,041 – \$101,250 = \$1,396,791
Operating Expenses:
- Salaries Expense: \$3,800
- Rent Expense: \$7,550
- Advertising Expense: \$18,500
- Depreciation Expense: \$8,000
- Delivery Expense: \$14,500
- Utilities Expense: \$112
- Supplies Expense: \$1,475
Total Operating Expenses: \$53,937
Operating Income: \$1,396,791 – \$53,937 = \$1,342,854
Other Revenues and Expenses:
- Interest Revenue: \$2,200
- Less: Interest Expense: (\$2,740)
Net Other Expenses: (\$540)
Income Before Tax: \$1,342,854 – \$540 = \$1,342,314
- Income Tax Expense: (\$7,580)
Net Income:
\$1,334,734
Explanation (300+ words):
A multi-step income statement is structured to separate operating activities from non-operating ones and to highlight gross profit, operating income, and net income distinctly. This format provides more detail for evaluating the financial performance of a business.
We start by computing Net Sales, which is total sales minus any sales returns, allowances, and discounts. In this case:
- Total Sales = \$1,500,000
- Less Sales Returns and Allowances = \$1,485
- Less Sales Discounts = \$474
- Net Sales = \$1,498,041
Next, we calculate the Cost of Goods Sold (COGS). This includes the cost of inventory sold during the period. We begin with the beginning inventory, add purchases, and freight-in, subtract purchase discounts, then deduct the ending inventory to find the total cost of goods sold:
- COGS = Beginning Inventory + Purchases + Freight-in – Purchase Discounts – Ending Inventory
- = \$1,750 + \$100,145 + \$142 – \$455 – \$332 = \$101,250
Gross Profit is the difference between Net Sales and COGS:
- \$1,498,041 – \$101,250 = \$1,396,791
Then, we list operating expenses, which are all day-to-day costs like salaries, rent, advertising, and depreciation. Total operating expenses amount to \$53,937, and subtracting this from gross profit gives Operating Income:
- \$1,396,791 – \$53,937 = \$1,342,854
Under Other Revenues and Expenses, we include non-operating activities such as interest earned and interest paid. Subtracting net other expenses (\$540) from operating income yields Income Before Tax:
- \$1,342,854 – \$540 = \$1,342,314
Finally, deducting Income Tax Expense of \$7,580 results in a Net Income of:
- \$1,334,734
This format gives a clearer picture of business operations and profitability than a single-step income statement
.