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Chapter 5.4

Chapter 5.4

Financial Accounting
Course Code
Liang Chen

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Chapter 5.4
Statement of Earnings Presentations
The single-step statement of earnings only does one thing: subtract total expenses from total revenues
before income taxes. Multiple-step statement of earnings shows all the steps required in arriving to the
net earnings total.
Single-Step Statement of Earnings
All data is categorized under revenue and expenses.
Multiple-Step Statement of Earnings
The multiple-step statement of earnings shows five main steps:
(1) Net sales
(2) Gross profit
(3) Earnings from operations
(4) Non-operating activities
(5) Net earnings
Net sales = sales t sales returns and allowances t sales discounts
Gross profit = net sales t cost of goods sold
Earnings from operations = gross profit t operating expenses
Sometimes operating expenses are divided into two categories: selling and administrative. Selling is
associated with making sales (i.e. advertising or salaries) and administrative are general operating
activities (i.e. accounting or legal).
Non-operating activities consist of other revenues and expenses that are unrelated to the company[s
main operations. Examples of revenues are interest or investing. Example of expenses is interest. Special
gains or losses are also reported here. These include sale of investments or casualty and theft.
Net earnings = earnings before income tax t income tax expense
Evaluating Profitability
Gross profit margin and profit margin are two more profitability ratios, which take into account the
impact of inventory. Inventory has a significant effect on a company[s profitability because cost of goods
sold is usually the largest expense on the statement of earnings
Gross Profit Margin
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