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Multi-step Income Statement quiz #1

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  • What is the primary purpose of a multi-step income statement?
    The primary purpose of a multi-step income statement is to provide a detailed breakdown of revenues and expenses, showing key subtotals such as gross profit, income from operations, and income before income taxes, leading to the final net income.
  • How is gross profit calculated on a multi-step income statement?
    Gross profit is calculated by subtracting the cost of goods sold (COGS) from net sales revenue.
  • What types of expenses are included in operating expenses on a multi-step income statement?
    Operating expenses include costs necessary for running the business, such as salaries, utilities, advertising, depreciation, rent, and insurance.
  • What is the difference between operating and non-operating activities on a multi-step income statement?
    Operating activities relate to the core business operations, while non-operating activities include revenues and expenses not related to core operations, such as interest revenue, dividend revenue, gains or losses from asset sales, and interest expenses.
  • Where is income tax expense shown on a multi-step income statement?
    Income tax expense is shown as the last expense, deducted from income before income taxes to arrive at net income.
  • What is the significance of the 'income from operations' subtotal?
    The 'income from operations' subtotal reflects the profitability of the company's core business activities after deducting operating expenses from gross profit.
  • How are gains and losses from the sale of assets reported on a multi-step income statement?
    Gains and losses from the sale of assets are reported under non-operating activities, as they are not part of the company's core business operations.
  • Why are interest revenue and dividend revenue considered non-operating items?
    Interest revenue and dividend revenue are considered non-operating items because they arise from activities outside the company's main business operations, such as investing excess cash or holding investments.
  • What is the order of presentation for major sections in a multi-step income statement?
    The order is: net sales, cost of goods sold, gross profit, operating expenses, income from operations, non-operating items, income before income taxes, income tax expense, and net income.
  • How does the multi-step income statement provide more useful information than a single-step income statement?
    The multi-step income statement provides more useful information by separating core business results from non-operating items and showing key profitability subtotals, helping users better assess company performance.
  • What is included in the calculation of net sales on a multi-step income statement?
    Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales.
  • What does the final net income figure on a multi-step income statement represent?
    The final net income figure represents the company's total profit after accounting for all revenues, expenses, non-operating items, and income taxes.
  • Where is interest expense reported on a multi-step income statement?
    Interest expense is reported under non-operating activities on a multi-step income statement, below income from operations and before income before income taxes.
  • How do you determine gross profit on a multi-step income statement?
    Gross profit is determined by subtracting the cost of goods sold (COGS) from sales revenue (or net sales) on a multi-step income statement.