Describe the three line items of the multistep income statement. Explain why it would be important for a company to break out its income in this manner.

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SOLUTION to ACC 240: Fundamentals of Accounting- Topic 2 DQ 1.

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The multistep income statement is a detailed financial report that breaks down the profitability of a company into three mainline items or sections (Lessambo, 2022). These three main line items include; revenue (also called Gross Sales), Cost of Goods Sold (COGS), and expenses. Revenue reflects the total amount of money received by a company from its actual sales of goods and services during a certain period. This top-line number captures all operating income generated by the business. Conversely, COGS refers to the direct costs attributed to producing the goods and services that were sold to generate that revenue (Wicaksono & Anwar, 2023). It includes things like material and production labor involved in manufacturing the products. By subtracting COGS from revenue, it derives the Gross Profit of the company, which is an important indicator of profitability at the early stages of operations before other costs are considered.

Additionally, expenses encompass all the operating costs and non-production outlays that occur over the period such as rent, utilities, sales and marketing expenditures, management salaries, and shipping among others (Lessambo, 2022). Deducting total expenses from gross profit arrives at operating income, thus demonstrating the real profitability from core business activities before taxes and financing are factored in. Breaking out the income statement into the above three steps provides important incremental information and analysis opportunities for a company. It allows management and investors to assess revenue trends, compare gross margins across products or divisions, isolate the relative cost structures, pinpoint areas of inefficiency, and benchmark expense ratios over time. This multi-step approach provides deeper insights beyond just a single "bottom line net income" number (Qui, 2020). Magni et al. (2020) adds that it identifies where value is created or destroyed within different stages of operations, thus empowering more informed management and investment decisions.

References

Lessambo, F. I. (2022). Analysis of the Statement of Income. In Financial Statements: Analysis, Reporting and Valuation (pp. 163-172). Cham: Springer International Publishing. https://doi.org/10.1007/978-3-031-15663-2_12

Magni, C. A., & Magni, C. A. (2020). Financial Statements. Investment Decisions and the Logic of Valuation: Linking Finance, Accounting, and Engineering, 83-158. https://doi.org/10.1007/978-3-030-27662-1_3

Qiu, W. (2020). Value-relevance of the multiple-step income statement–an analysis of earnings components.

Wicaksono, A., & Anwar, C. (2023). Analysis of Cost of Goods Sold Calculation in MSMEs Pahala Geprek & Chicken. International Journal of Global Accounting, Management, Education, and Entrepreneurship, 4(1), 124-128. https://doi.org/10.48024/ijgame2.v4i1.102