Refer to the list of income statement items in Problem 2-6A. Assume that Corbin Enterprises classifies all operating expenses into two categories: (1) Selling and
(2) General and administrative.
1. Prepare a multiple-step income statement for the year ended December 31, 2010. 2. What advantages do you see in this form for the income statement? 3. Compute Corbin’s profit margin.
4. Comment on Corbin’s profitability. What other factors need to be taken into account to assess Corbin’s profitability?
Multiple-step income statement:
FOR THE YEAR ENDED DECEMBER 31, 2010
Cost of goods sold
Total selling expenses
General and administrative expenses:
Total general and administrative expenses
Total operating expenses
Income from operations
Other revenues and expenses:
Excess of other revenues over other expenses
Income before taxes
Income tax expense
The main advantages of the multiple-step income statement are the groupings of various items and the provision of important subtotals such as income from operations.
= Net Income/Sales
= $58,550/$350,000 = 16.7%
A profit margin of 16.7% means that for every dollar of sales the company has net income of $0.167. This would appear to be a good profit margin, but it would be important to compare the profit margin with prior years and with other companies in the same industry.
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