r THE MULTI-STEP INCOME STATEMENT ACTIVITY 24 . . Purpose: ldentify the types of accounts presented on the income statement. Understand the organization of the multi-step income statement. When amounts ore requested, refer to the income stotement of Apple, lnc. on the next page' Revenues are inflows from a company's primary operations. Expenses are the costs of bringing in revenues. Cost of Goods Sold (COGS), also referred to as Cost of Sales, is the cost of purchasing or manufacturing the actual products sold. lt is an operating expense. Q1 from the sale of Mac computers, iPods, iPhones, iPads, iTunes, and other related products and services totals $ (iltÇ4,l( million I can't tell) and the cost o/ those Soles revenue earned products totals ($3?rl4l milllon / can't tell). , Operating expenses include all costs of generating sales besides COGS. Nonoperating revenues and expenses affect income, but have little relevance to operations. These typically include financing expenses, investment income, and gains and losses on the sale of assets other than inventory. Q2 (213 I @operotins expense accounts othe r than COGS) that total by a little b¡t), which ¡s operat¡ng expenses) is(are) g Apple's inco $ manufacturing firm Q3 revenues and Nonoperating revenues ond expenses refer to (operating / investing / investing / nses. /nterest expense reflects the firm's cost of borrowing and is a( cost that is classified on the income statement as a(n) (operating It from Apple's primary busine , â11 d expense. lnvestment income (does / oes revenue. When retailers and therefore, should be classified as (operating / and when they sell property, n( manufactures sell inventory gain plant, and equipment revenue million expenses total S reported. For Apple, nonoperating revenues ond ( Provision for income tax is income tax expense based on the amount reported for income before income tox. Nonrecurring items are gains and losses which accountants deem unusual and infrequent. They include (D)iscontinued operations, and (E)xtraordinary items. Q4 e5 Apple's overoge income tox rotewas (7% I nN €+"ù. Nonrecurring items are items that o..rr@twice / continuously) within the life of a company. ldentify each of the following as either a (D)iscontinued or (E)xtraordinary type of nonrecurring item. @tn (D() PepsiCo sells off Pizza Hut, Taco Bell, and KFC. Due to global warming the tundra melts in Barrow, Alaska, resulting in flooding an entire factory and closing it indefinitely IFRS items and has a narrower definition orô t E)items. income statement reports the results of operations (as of a certain date Q6 Q7 does not allow (D lncome re nt accounts are listed in (alph activíty no particular order). Th e top an d (operating revenues over a period rder nonrecurring ite nonrecurring items) are reported at the bottom of the income statement, lncome Statement È- Page 78 Chapter 3 e1 the ínformation betow for J.C. Penney qnd lntel to onswer the following questions. use FYE 20L0 ($ f.C. Penney in millions) $ Sales revenue Corp 17,759 Intel $ (A) Expense $ Net income 389 o/o ROS A" ì?,S?0 X= l+?,613 / calculate the values for (A) and (X). Revenue for INTC is more tha a I reater than (2 times / 1O revenue for JCP, whereas net incope for ter than net income for times 10 times) approximately I JCP Examine the relationship between sales Revenue and Net lncome b. t. 2. 3. 4. rporation (JcP is generating the most net income from each dollar of revenue. This relations hip is measured by the(ñõð) Asset Turnover Calculate ROS and record in the space provid ed above. / ROn) ratio' .-tø oVol' has a greater clearly much higher, revealing that (JCP of (JcP / @s ability to translate revenue into profits; keep expenses under control But does the (Yes higher Ros mean that one company is better than the other company? RoS (are the same e these companies are from different industries, and ROS averages industries Q2 chart Let's examine three companies within the Personal Computer Systems industry' Use the below to answer the following questions. Stock symbols are shown in parentheses. Return on Sales ROSI 72.1o/o Asset Turnover (Asset 1,00 Return on Assets [ROA) Gross Profit Margin [G 24.2o/o 37.3o/o w r¡ 7.6to/o\ 25.75o/o 9.07o/o ,a 7.84o/ot¡ 39.30o/o 18.840/o 1¡ 22.3o/o 0.87 5.670/o q *"r" l0 ,70 a f cents of each revenue dollar, while each revenue dollar were used to pay for the costs of running the business. b. One measure of sales volume is the ROS c. Compa nies invest in assets For AAPL, profits Turnover 1.03 1.60 A 'T[ cents of / RoA) ratio. to generate additional revenue, to increase net iricome. AAPL assets' ls a company with a ea rned q,ffu cent(s) in profit from each dollar invested in rofits than a companY with a assets more efficientlY to ge n greater ROA ratio is not) comparable among lower ROA ratio? Yes / No I can't tell), because ind ustries. lncome Statement Page 86 Chapter 3 d. a large volume of sales gene rati lt was shown in Activity 8 that wal-Mart makes profits by Asset for Wal-Mart is rela on items with low Profitabi ratio), can't tell). RoS x Asset Tlo = ¡ Turnover is relativelY (low profitability most) comprehensive measure of th which is considered e. During 2010, it cost AAPL ff,,Al cents of each revenue dollar to prod uce Mac comPuters, 40,S? products and services leaving iPods, iPhones, iPads, iTunes, and other related nonoPerating revenue dollar to cover all remaining operating expe nses, cents of each tn"@ second expenses, and profits. The Gross Profit Margin (GP%) is n for bot of profitability shown on the income statement' The informatio denominator of the GP% ratio come from statement of cash flows)' f the (balance / last) indication and ncome statement sheet low) ratio indicates greater profitability and an increasing For profitabilitY ratios unfavorable) trend is conside among t he three comPanies in the On the previous page, for each ratio, circle the strongest Personal Computer Systems industry. - \oe f'f c. h norms because success may Meaning is added to a rat¡o by comparing that ratio to industry is weaker than the Personal vary by industry. on the previous page, cross out each ratio that Computer Systems industry average. ratios that were crossed out Review the ratios that were circled as the strongest and those questions' for being lower than the industry average to answer the following j.. 2. which company has the greatest markup on products which ratio reveals this information? sold? @orrl/jlF\ (Ros profitable? Which ratio reveals this 5. (Ros information? (AIJPIDELL/ HPQ) I RoA I GP%\ Asset To sales revenue? compa DEIL (Ros / Asset TO Which comPanY has the stiongest P rofitabi DErr / HPQI Why? øvrvto + {AVê\úe.. ûo&. % Which company has the weokest profitability? (AAPL % 4 vuunw Page 87 {t /H / Which ratio reveals this information? l,n lncome Statement / ,z\ (!9yl Which company has the lowest product costs d6¡ '0 6. KW is the According to the most comprehensive measure of profitab¡litY,)4,\company most 4. RoA a greater Which company appears to sell at a low markup to generate Which two ratios reveal this information? 3. / AssetTo I PQ\ Vu"e lo,oô WhY? . Chapter 3