APPLY THE CONCEPTS: Construct the income statement

When constructing the income statement, it is important to understand the distinction between a single step and a multiple-step format. Open the links to see examples of each while taking care to study their unique characteristics.

+ Multiple-step Income Statement

Income Statement (Multiple-step)
For the Year Ending May 31, 20Y8
Sales			$10,000
Cost of goods sold			(2,500)
Gross profit			$7,500
Operating expenses
	Selling/general/administrative expense	500
	Research and development expense	600
	Depreciation expense	1,000
Total operating expenses			($2,100)
Operating income			$5,400
Other revenues and expenses
	Rent revenue (nonoperating)	700
	Interest expense (nonoperating)	(100)
Total other revenues and expenses			$600
Net income			$6,000

+ Single-Step Income Statement

Income Statement (Single-Step)
For the Year Ending May 31, 20Y8
Revenues:
	Sales	$10,000
	Rent revenue (nonoperating)	700
Total revenues			$10,700
Expenses:
	Cost of goods sold	2,500
	Selling/general/administrative expense	500
	Research and development expense	600
	Depreciation expense	1,000
	Interest expense (nonoperating)	100
Total expenses			($4,700)
Net income			$6,000

Benton Co. has compiled the following account balances from its general ledger on May 31, 20Y8 (the last day of its fiscal year).

+ Trial Balance

Account	Amount
Cash	$62,460
Accounts receivable	150,120
Inventory	195,870
Prepaid insurance	25,030
Equipment	493,380
Accumulated depreciation	84,680
Accounts payable	63,865
Notes payable	111,865
Common stock	200,000
Dividends	52,870
Retained earnings	278,420
Sales	3,384,420
Rent revenue (Nonoperating)	19,930
Cost of goods sold	2,390,295
Interest expense (Nonoperating)	15,410
Selling/general/administrative expense	550,610
Research and development expense	168,080
Depreciation expense	39,055

The balance in the Retained Earnings account reflects the account balance before temporary accounts are closed. In addition, the Notes Payable balance includes notes payable of $22,375 due within the next year and $89,490 of notes payable that are not due for several years. Use the information given to create Benton Co.s annual financial statements. Construct Bentons multiple-step income statement for 20Y8.

Benton Co.
Income Statement (Multiple-step)
For the Year Ending May 31, 20Y8
Sales		$
Cost of goods sold
Gross profit		$
Operating expenses
Selling/general/administrative expense	$
Research and development expense
Depreciation expense
Total operating expenses		$
Operating income		$
Other revenues and expenses
Rent revenue (nonoperating)	$
Interest expense (nonoperating)
Total other revenues and expenses		$
Net income		$

Feedback

Click on the sample multiple-step income statement above to review its structure. Then select the accounts from the trial balance that best fit each section.

APPLY THE CONCEPTS: Construct the statement of retained earnings

The statement of retained earnings shows the change in retained earnings as a result of net income and any dividends declared. It also serves as an important link between the income statement and the balance sheet in that it translates the effects of net income into an updated number for retained earnings. Construct Bentons retained earnings statement for 20Y8.

Benton Co.
Retained Earnings Statement
For the Year Ending May 31, 20Y8
Retained earnings, June 1, 20Y7		$
Add: Net Income	$
Less: Dividends
Increase in retained earnings
Retained earnings, May 31, 20Y8		$

Feedback

The retained earnings statement tracks additions and subtractions from the retained earnings account through the year. The amount shown in the Trial Balance above is the beginning retained earnings.

You then need to account for the effect of the net income, as shown on the income statement of the prior step, as well as any dividends paid, in order to arrive at a final balance in the retained earnings account.

APPLY THE CONCEPTS: Construct the balance sheet

The balance sheet, also known as the statement of financial position, shows the companys assets and the claims against those assets in the form of liabilities and stockholders equity. Unlike financial statements that display financial performance over a given interval of time, the balance sheet is a snapshot of a financial position at a given point in time.

Construct Bentons balance sheet in account form for 20Y8.

Benton Co.
Balance Sheet
May 31, 20Y8
Assets
Current assets
Cash	$
Accounts receivable
Inventory
Prepaid insurance
Total current assets		$
Property, plant, and equipment
Equipment	$
Less accumulated depreciation
Total property, plant, and equipment
Total assets		$
Liabilities
Current liabilities
Accounts payable	$
Notes payable (current portion)
Total current liabilities		$
Long-term liabilities
Notes payable (long-term portion)
Total liabilities		$
Stockholders' Equity
Common stock	$
Retained earnings
Total stockholders equity		$
Total liabilities and stockholders equity		$