Question

Psymon Company, Inc. sells construction equipment. The annual fiscal period ends on December 31. The following adjusted trial balance was created from the general ledger accounts on December 31:
Account Titles Debits Credits
Cash $ 59,810
Accounts Receivable 24,800
Inventory 90,500
Property and Equipment 67,000
Accumulated Depreciation $ 28,100
Liabilities 41,900
Common Stock 124,000
Retained Earnings, January 115,000
Sales Revenue 258,500
Sales Returns and Allowances 8,700
Sales Discounts 11,400
Cost of Goods Sold 138,800
Salaries and Wages Expense 23,800
Office Expense 24,800
Interest Expenses 3,700
Income Tax Expense 14,190
Totals $ 467,500 $ 467,500
Required:
1. Prepare a multistep income statement that would be used for internal reporting purposes. Treat Sales Discounts and Sales Returns and Allowances as contra-revenue accounts. TIP: Some of the accounts listed will appear on the balance sheet rather than the income statement.
2. Prepare a multistep income statement that would be used for external reporting purposes, beginning with the amount for Net Sales.

Answer 1

Answer:

1. Multi-step income statement Internal Reporting Purposes

Sales Revenue                                                                  258,500

Less Sales Returns and Allowances                                  (8,700)

Less Sales Discounts                                                          (11,400)

Net Sales                                                                            238,400

Less Cost of Goods Sold                                                  (138,800)

Gross Profit                                                                          99,600

Less Operating Expenses :

Salaries and Wages Expense                          23,800

Office Expense                                                  24,800    (48,600)

Operating Income/(loss)                                                     51,000

Less Non- Operating Expenses :

Interest Expenses                                              3,700

Income Tax Expense                                         14,190     (17,890)

Net Income/Loss                                                                 33,100

2. Multi-step income statement External Reporting Purposes

Net Sales                                                                            238,400

Less Cost of Goods Sold                                                  (138,800)

Gross Profit                                                                          99,600

Less Operating Expenses :

Salaries and Wages Expense                          23,800

Office Expense                                                  24,800    (48,600)

Operating Income/(loss)                                                     51,000

Less Non- Operating Expenses :

Interest Expenses                                              3,700

Income Tax Expense                                         14,190     (17,890)

Net Income/Loss                                                                 33,100

Explanation:

It is important to remember that a multi-step income statement shows separately profit earned from Primary Activities of the firm and that earned from Secondary Activities.

There are no strict rules for preparation of Financial Statements for Internal use and this may include many other line items. However for external reporting proposes, preparers of financial statements have to comply with Accounting Standards (GAAP or IFRS).