 Hello and welcome to this session. This is Professor Farhad and this session we would look at a multiple step and a single step income statement. This topic is covered in a financial accounting course as well as the CPA exam. As always I would like to remind you to connect with me on LinkedIn if you haven't done so. YouTube is where you would need to subscribe. I have 1600 plus accounting, auditing, finance and attacks lecture. This is a list of all the courses that I cover. If you like my lectures, please like them. Click on the like button. It doesn't cost you anything. Share them. Put them in playlists. If they benefit you, it means they might benefit other people and please connect with me on Instagram. On my website you will find additional resources if you're interested in supplementing your studies, especially if you're studying for your CPA exam. I have plenty of supplemental material. I strongly suggest you check out my website. So we learn about the income statement and simply put the income statement is revenues minus expenses. Now as we saw when it comes to merchandisers, the income statement will have intermediate steps like cost of goods sold. We might have other items such as gains and losses. So the question becomes how do we prepare this income statement? Gap allows us to prepare the income statement using two different formats, either a single step or a multiple step. So we're going to start to show you the single step. Then I will show you the multiple step income statement. The single step is basically one single step. We take all the revenues and we bunch them together. Net sales, interest revenue and gain. Now we all know what net sales is basically or at least say oh well we also learn about net sales. Net sales is sales minus sales discount minus sales returns and allowances. So we don't show you the whole thing. All what we show you is net sales. Okay so we don't show you the whole formula. Interest revenue is revenue from other sources like interest you have money in the bank, you earned interest or you might have some bond that earned interest and gain on a sale of a building basically the company sold a building that they don't use anymore. So this building is basically peripheral. It's incidental to their business. They no longer want to have therefore they sold it. Let's assume for the sake of simplicity it had the cost of 750,000 and they sold it for 752,500. So the additional 2,500 is in is the gain. It's a gain. Now why don't we call it sales? Because this company is a merchandising company and is not in the business of selling their building but they happen to sell a building and it increases it generated a gain. Therefore we list the gain different than sales because it's not sales. Sales is what they do on a day-to-day basis. So what we did here is we bunch all the sales, the revenues and the gain together and we call them total revenue. Then what we did we took all the expenses including cost of goods sold, all the selling expenses of general and administrative and interest expense. We bunched them all together. We took revenues minus expenses and we got the net income. This is called the single step income statement. It's one single step we took revenues minus expenses. Now remember this number here 14,900. Now we're going to take the same information that we have on the slide and we're going to prepare the multiple step income statement. So the multiple step as the word suggests it will have more than one step in preparing the financial statement. First step is we look compute sales or net sales. How do we compute net sales? Net sales is sales which is 321,000 minus sales discount minus sales returns and allowances. This is net sales. Then we're going to from net sales deduct cost of goods sold. Now if cost of goods sold is not giving to you this is the formula to compute cost of goods sold. It's beginning inventory plus purchases or net cost of purchases gives you goods available for sale. So we had 19,000 of beginning inventory. 232,400 is the net purchases what we purchased. Therefore what we started with plus what we purchased what we called goods available for sale. It means the total amount of goods that's available for our customers to sell it 254,400. Now did we sell anything? Not at all. We still have 21,000. So if we had 251,400 the maximum amount we can sell to our customers goods available for sale and we still have 21,000. What does that mean? It means we still have left. If we still have left 21,000 it means we sold 230,400. Now in this course and in financial accounting usually this amount is given to you 230,400. So if we take net sales minus cost of goods sold we compute the gross profit. So the gross profit is kind of step one in the process computation of the gross profit and you need to know how to compute gross profit. It's very this formula is very important. So the formula is net sales minus cost of goods sold equal to gross profit. Now you need to know how to compute net sales if you are not given that figure and you need to know how to compute cost of goods sold if that figure is not giving. Otherwise if net sales and cost of goods sold given net sales minus cost of goods sold. Now we're done. Now from the gross profit we are going to deduct what we called our operating expenses because gross profit is only covers the cost of the goods that we purchased. After we cover the cost of the goods what we have to do is we have to cover our operating expenses paying salaries, paying utilities, paying grant, paying insurance, paying salaries but what's going to happen for operating expenses? We're going to break them down into two categories. Category A and Category B. Category A it's going to be selling expenses. So Category A I'm going to call it selling expenses and what goes under selling expenses? What goes under selling expenses are all the expenses that are that directly support the effort of selling? What are some of these, what are some of these expenses that support the effort of selling? Well one obvious example is advertising expense. What does advertising expense is? Advertising means you are spending money, you are spending money to generate sales. So clearly advertising is a selling expense. Now also sales salaries expense you pay certain employees money solely to help you sell the product like salespeople that's selling expense. Now if you are renting a space for your salespeople you have rent expense for the selling space the salespeople might consume supplies in the effort of selling the product like they might need packages to put the product and when they ship it out that's also a selling expense. Also if there's any shipping cost shipping out if they ship any product out if there's any shipping cost that's a selling expense. Also they might be using equipment like computer equipment in the effort of selling you're going to have depreciation expense for the computer equipment. So simply put what is a selling expense is any expense that goes into the effort of making sales. It happens to be for this company 42,100 that's the first category of operating expenses. The second category of operating expenses is called general and administrative expenses. Those expenses they don't support the selling effort they support the company as a whole like what? Rent expense office space hold on a second didn't we use rent expense selling space well this is office space and this is selling space what is the office space it's think of it where the CEO the payroll HR all those positions that serve the whole company not selling so they might have they might rent a space to operate this is rent expense office space. Also these individuals might consume supplies that's office supplies expense hold on a second we have also store supplies there whether depending on the supplies whether it's for selling or not for selling insurance expense well also we could have insurance expense up here if we are ensuring any items that we use for selling purposes notice salaries but those are office salaries office salaries are salaries maybe for the secretary for the staff support those are general and administrative and we do also have depreciation expense for office equipment for the equipment that are used at the office not for the equipment that are used at the store where we make the sale so we break those operating expenses into two categories a and b then we're going to take the gross profit and deduct the gross deduct this total selling and total administrative expenses which is in total 71 400 and come up with an important number income from operation income from operation is an important number because this tells us whether you are making a profit or not making a profit from operating your business we call this whole section income from operation computation okay it means from operating the business from opening the store every day and operating the business are we making a profit are we incurring a loss here luckily we are incurring a profit generating a profit now right after income from operation we would list other items such as other revenues and gains expenses and losses so those are other revenues and gains they have nothing to do with your operation like interest revenue you might have interest revenue in the bank because you have money in the bank but that has nothing to do with operating the business but you generated a thousand dollar of revenue you sold that building gain on sale of a building and you generated a gain of 2400 because you sold it more than its basis more than its cost now if you sold it less than its cost rather than a gain you would have a loss but here you have a gain and interest expense interest expense like interest revenue it has nothing to do with operating your business it has to do with the money you are borrowing for the business that depends on your interest on your credit on the reputation of the business so it has nothing to do with operating the business therefore interest expense is listed separately so we net this category out for other revenues and expenses and usually that's not a large one and the net is positive 2000 now we take income from operation we add to it the 2000 and we come up with net income of 14900 now if we if we have if we are having taxes taxes will be listed on a separate line but here we happen not to not to not to assume we have taxes so notice this section here this section right here is called non-operating activities computation non-operating means those activities has nothing to do with those activities which are operating and when you evaluate a business you are concerned with operating activities not non-operating activities and notice net income is 14900 i told you to remember that number because if we go back to the single step income statement net income is 14900 so either use the multiple step or the single step net income should be the same however the multiple step income statement will give you more information about the company more information about the company as for example what's their selling expense in relationship to sales what's their general and administrative in relationship to sales the single step it gives you all the information but it's it's kind of it's giving it to you an aggregate it's not really very helpful last but not least the classified balance sheet for a merchandiser just like the classified balance sheet for any other company except that we are introducing a new account called merchandise inventory because merchandise inventory represent a large portion of a merchandisers therefore it's a new account that we are being introduced to in this chapter in the next session what i'm going to do i'm going to look at the periodic inventory system and how we would journalize entries using periodic rather than perpetual up to this point we were dealing with perpetual inventory system as always i would like to remind you to please like the recording subscribe visit my website for additional resources if you are studying for your cpa exam and you want those extra five to seven points my website might be the solution for you may push you above that score that secret score of 75 to help you pass study hard and good luck accounting is difficult it's challenging let me rephrase it's challenging but it's worth it so study hard