Exercise 4-5 Two accountants for the firm of Elwes and Wright are arguing about

Question

Exercise 4-5 Two accountants for the firm of Elwes and Wright are arguing about the merits of presenting an income statement in a multiple-step versus a single- step format. The discussion involves the following 2017 information related to Buffalo Company ($000 omitted) Administrative expense $5,039 4,099 60,709 17,369 Officers' salaries Depreciation of office furniture and equipment Cost of goods sold Rent revenue Selling expense 2,829 8,119 6,619 96,639 9,209 1,999 Delivery expense Sales commissions Depreciation of sales equipment Sales revenue Income tax Interest expense Common shares outstanding for 2017 total 40,550 (000 omitted)

Explanation / Answer

Decision - Analysis of Choosing between Multiple step and Single Step Statement

Based on the above analysis, it is profitable to use multiple step income statement

Part A Income statement using multiple step

This approach is useful for segregating operating expenses and operating income from non operating items. This approach also disclose gross profit

$0.38

($15386/40550)

Part B Income statement using single step

This approach is useful for small operations. Since this approach require the only one subtraction to arrive at net revenue. Thisbapproach is not heavily uses

Multiple Step Income Statement Single Step Income Statement This appraoch gives more detailed information including gross profit and operating data This approach has lack of information This appraoch presents each item under specific head and itemized it. It presents the data on net income basis only and investors does not invest generally on net income factor. They rely on other data also other net Income factor Investors generally use data of multiple step income statement for analysing company's overall health and in making investment decision Generally management lose out opportunities to generate more operating capital because of following this approach which does not satisfy investors analytics.

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