On a multi-step income statement prepared under U.S. GAAP, where is interest expense typically reported?

• A. As a component of cost of goods sold, above gross profit
• B. In the nonoperating section (other expenses and losses), below income from operations
• C. Within selling and administrative expenses as an operating expense
• D. As an addition to net sales in the revenues section

Answer: (B)

Verified step by step guidance

1. Understand the structure of a multi-step income statement under U.S. GAAP, which separates operating activities from nonoperating activities to provide clearer insight into a company's core business performance.
2. Identify that the gross profit is calculated as net sales minus cost of goods sold, and operating expenses (such as selling and administrative expenses) are reported below gross profit to arrive at income from operations.
3. Recognize that interest expense is not part of the core operating activities; instead, it relates to financing costs and is therefore reported separately from operating expenses.
4. Locate the nonoperating section on the income statement, which appears below income from operations and includes items such as interest expense, other expenses, and losses that are not directly related to the primary business operations.
5. Conclude that interest expense is typically reported in the nonoperating section (other expenses and losses), below income from operations, to clearly distinguish it from operating expenses and cost of goods sold.