ACCT200 Lecture 7 Outline of Last Lecture II Merchandising Operations III Recording Purchases of Merchandise Outline of Current Lecture I Recording Sales of Merchandise cont II Income Statement Presentation III Evaluating Profitability Current Lecture Chapter 5 Continued Income Statement Presentation Single 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 expenses o Form is simple and easy to read Multiple Step Income Statement Highlights the components of net income Three important line items o Gross profit o Income from operations o Net income Key items o Net sales o Gross profit o Operating expenses o Non operating activities o Net income These 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 Profitability Gross 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 casuses o Selling products with a lower markup profit margin o Increased competition may result in a lower selling price o 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 rate Profit 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 sold o Profit margin ratio measures the extent by which selling price covers all expenses including cost of goods sold o Profit margin net income net sales Key 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 years