Exams

Question 1

There are three formulas you need to use for this method of calculating net income

Answer 1

To calculate gross profit on your income statement, you use the formula:
Gross Profit = Net Sales – Cost of Goods Sold

To calculate operating income, you use the formula:
Operating Income = Gross Profit – Operating Expense

To calculate net income, you use the formula:
Net Income = Operating Income + Non-Operating Items

Question 2

How to Prepare a Multi-Step Income Statement

Answer 2

1. Select Your Reporting Period
2. Create a Document Header
3. Add Operating Revenues —The top section of your multi-step income statement covers your total operating activities. First, add your operating revenues, which is the sales revenue generated from selling your goods or services.
4. Add Operating Expenses—Next, add your total operating expenses to the operating activities section. This would include cost of goods sold, as well as costs such as advertising expenses, salaries and administrative expenses, including office supplies and rent.
5. **Calculate Gross Profit **— To calculate the gross profit, subtract the cost of goods sold from the net sales. Add the final number as a line item under the cost of goods sold and title it Gross Profit.
6. Calculate Operating Income—Next, you’ll need to calculate operating income. To do so, subtract your operating expenses from your gross profit. Add the final calculation as a line item at the bottom of your operating activities section, titled Net Operating Income or Income from Operations.
7. Add Non-Operating Revenues and Expenses—In the bottom section of your income statement, below your operating activities, create a section for your non-operating activities. Add your revenues and expenses from non-operating activities, including interest and the sale or purchase of investments.
8. Calculate Net Income—The final step in creating a multi-step income statement is calculating net income. To do so, add together your operating income and your non-operating items. Add the total to the bottom of the income statement as Net Income. If it is a positive number, you’re reporting a profit. If the total is a negative number, you’re recording a loss.