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 June 30, 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 June 30, 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

Pleasant Co. has compiled the following account balances from its general ledger on June 30, 20Y8 (the last day of its fiscal year).

+ Trial Balance

Account	Amount
Cash	$62,050
Accounts receivable	149,240
Inventory	195,430
Prepaid insurance	24,560
Equipment	492,380
Accumulated depreciation	83,650
Accounts payable	62,760
Notes payable	108,000
Common stock	200,000
Dividends	52,000
Retained earnings	280,280
Sales	3,376,770
Rent revenue (Nonoperating)	19,280
Cost of goods sold	2,389,630
Interest expense (Nonoperating)	15,270
Selling/general/administrative expense	548,490
Research and development expense	164,150
Depreciation expense	37,540

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 $20,500 due within the next year and $87,500 of notes payable that are not due for several years. Use the information given to create Pleasant Co.s annual financial statements. Construct Pleasants multiple-step income statement for 20Y8.

Pleasant Co.
Income Statement (Multiple-step)
For the Year Ending June 30, 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		$

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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 Pleasants retained earnings statement for 20Y8.

Pleasant Co.
Retained Earnings Statement
For the Year Ending June 30, 20Y8
Retained earnings, July 1, 20Y7		$
Add: Net Income	$
Less: Dividends
Increase in retained earnings
Retained earnings, June 30, 20Y8		$

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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 Pleasants balance sheet in account form for 20Y8.

Pleasant Co.
Balance Sheet
June 30, 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
Total liabilities		$
Stockholders' Equity
	$
Total stockholders equity		$
Total liabilities and stockholders equity		$