ACCT200 Lecture 7 Outline of Last Lecture II. Merchandising OperationsIII. Recording Purchases of MerchandiseOutline of Current Lecture I. Recording Sales of Merchandise cont.II. Income Statement PresentationIII. Evaluating ProfitabilityCurrent LectureChapter 5 ContinuedIncome Statement PresentationSingle- Step Income Statement - Subtract total expenses from total revenues- Two reasons for using the single- step format:o Company does not realize any type of profit or income until total revenues exceed total expenseso Form is simple and easy to readMultiple-Step Income Statement- Highlights the components of net income- Three important line items:o Gross profito Income from operationso Net income- Key itemso Net saleso Gross profito Operating expenseso Non-operating activitieso Net incomeThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Evaluating ProfitabilityGross Profit Rate- May be expressed as a percentage by dividing the amount of gross profit by net sales- A decline in the gross profit rate might have several casuseso Selling products with a lower “markup” (profit margin)o Increased competition may result in a lower selling priceo Company forced to pay higher prices to its supplies without being able to pass these costs on to its customers- GP = sales – COGS- GP/Net Sales = gross profit rateProfit Margin Ratio- Measures the percentage of each dollar of sales that results in net income- How do the gross profit rate and profit margin ratio differ?o Gross profit rate- measures the margin by which selling price exceeds cost of goods soldo Profit margin ratio- measures the extent by which selling price covers all expenses (including cost of goods sold)o Profit margin = net income / net salesKey Points:- IFRS- international financial reporting standards- Under both GAAP and IFRS a company can choose to use either a perpetual or periodic system - IFRS requires that two years of income statement information be presented, whereas GAAP requires three