Question

1. Arrange the following income statement items so they are in the proper order of an income statement:Taxes Earnings per shareShares outstanding Earnings before taxesGross profit shares outstanding Cost of goods soldInterest expense Earnings after taxesDepreciation expense Earnings available to commonPreferred stock dividends stockholdersOperating profit Selling and administrative expenseSalesGross profit

Answer 1

Answer:

The following income is arranged as follows:

Sales, Cost of goods sold, Gross profit, Selling and administrative expenses, Depreciation expenses, Operating profit, Interest expense, Taxes, Earnings after taxes or income, Preferred  stock dividends, Earning available to common stockholders.

Explanation:

Solution

An income statement starts with sales. Its second line is cost of goods sold. When cost of goods sold is deducted from sales, the resulting amount is the gross profit. So, gross profit is the third item after sales and cost of goods sold.

As stated earlier, selling and administrative expenses as well as depreciation expenses are the operating expenses. So, after gross profit, selling and administrative expenses are mentioned. Then depreciation expense is mentioned. When all these operating expenses are deducted from gross profit, the resulted amount is the operating profit.

Interest expense is the non-operating expense. After operating profit, interest expense is mentioned. When interest expense is deducted from operating profit, the resulted amount is the earnings before taxes.

After earning before taxes, tax expense is mentioned. When tax expense is deducted from earnings before taxes, the resulted amount is the earnings after taxes or net income.

After net income or earnings after taxes, preferred stock dividends is mentioned. After then, earning available to common stockholders is mentioned.

After net income or earnings after taxes, preferred stock dividends is mentioned. Whenever a company has preferred stock, the preferred stock holders have first right to get dividends from net income, before common stockholders. So, preferred stock dividends are deducted from net income to get the earnings available to common stockholders. So, earning available to common stockholders comes after preferred stock dividends and net income. The earnings available to common stockholders is the very bottom line of any income statement. Outstanding shares are not mentioned on the income statement.

Now,

A proper order of the income statement items are stated as follows:

• Sales

• Cost of goods sold

• Gross profit

• Selling and administrative expenses

• Depreciation expenses

• Operating profit

• Interest expense

• Taxes

• Earnings after taxes or income

• Preferred  stock dividends

• Earning available to common stockholders